Financial gifting can have roadblocks, especially if the recipient is minor

Topics gifts | Mutual fund | fixed deposit

Each financial product is governed by a different regulator and the rules for gifting vary | Illustration: Ajay Mohanty
Securing someone’s financial future is the best gift you can give them. Instead of giving cash, a prepaid card or buying gold, gift something that can help your close ones financially in the future. An equity product given as a gift, for example, can multiply in value over the years. A small corpus can become a significant amount that can come handy when a minor turns into an adult.

Say, you give a gift on an equity product worth Rs 2 lakh. In 15 years, the corpus can become Rs 10.95 lakh if the investment compounds at 12 per cent each year. At a similar growth rate, Rs 5 lakh can become Rs 48.23 lakh in 20 years.

But each financial product is governed by a different regulator and the rules for gifting vary. In the case of bank fixed deposits (FDs), for example, you can open one in your name and that of the receiver jointly. You will need to complete the Know Your Customer (KYC) procedure for both account holders. If the receiver is a minor, it is unlikely that he or she will have proof of KYC. So, you can be the guardian. When the FD matures, the bank will deduct the tax at source and pay the proceeds to the recipient. If the receiver is a major, the proceeds will be added to her income and taxed. In case of a minor, clubbing provisions under the Income Tax Act will apply.

When it comes to mutual funds, things can get complicated. In most cases, mutual funds do not allow gifting of units between two adults. “Even in case of husband and wife, both of them need to be primary and secondary account holders. If the husband is the primary account holder, the cheque has to come either from the husband’s account or from the joint account. A transfer from the wife’s account will be rejected as she is the secondary folio holder,” says Harshad Chetanwala, head, customer delight, Quantum Mutual Fund. According to Chetanwala, friends can’t gift mutual fund units to each other. Close relatives can gift, but they need to have a joint bank account and also need to be joint folio holders. The donor has to be the primary folio holder.

Gifting mutual funds units to minors is easier. Say, a grandfather or an uncle wants to gift units to a grandson or nephew. He would need to fill up a third-party payment declaration form, which the parent as well the donor would need to sign. There is a restriction of Rs 50,000 on each transaction.

Stocks are the easiest. The donor can gift shares by transferring them directly to the recipient’s demat account.

In the case of life insurance, insurers first check whether the donor has an insurable interest. It means that in case of death of the person he should have provable or potential economic loss. Friends or distant relatives don’t have an insurable interest. They cannot, therefore, gift an insurance policy.

Insurers allow close relatives to gift life insurance policies, like grandparent to grandson. But if an uncle is buying a policy for a niece or nephew, they ask additional questions to see the insurable interest and only then allow. “There’s also a moral hazard principle. Due to this, grandparents or parents can gift a life insurance policy to the next generation but not the other way around. Children can’t buy for parents or grandchildren for grandparents,” says Anil PM, head – legal and compliance, Bajaj Life Insurance Company.

Gifting mutual fund to minor
  • Investment form has to be signed by a parent or legal guardian
  • Parent and donor need to do complete KYC
  • Donor needs to fill up a third-party investment declaration form
  • Parent and donor need to sign the form
  • The amount should be Rs 50,000 or lower

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