How Does Fixed Deposit For Kids Work?

Financial planning goals of an individual always include saving for their children. Starting early, we can define the child’s goals and likely requirements at different stages of their growth and save wisely.

A Fixed Deposit is the safest and most secure investment option.It offers a steady, assured return on investment in the form of interest. The principal amount can be withdrawn easily on maturity. Fixed Deposit is a safe bet for the cautious investor having a low-risk appetite. It is not subject to market fluctuations and yields a fixed and regular interest during its term.

Why to Invest in Child Fixed Deposit Plans?

Child Fixed Deposit plans are amongst the more popular child investment plans. This saving plan for children will fulfil educational, marriage, and other entrepreneurial dreams and aspirations of your kids and give them a secure future. An early Fixed Deposit in the name of your child will bring you immense mental peace. Every renewal of the deposit made will grow the corpus amount substantially.

Fixed Deposit for kids can be made even when they are just 1 year old. The minimum amount of deposit is small and not burdensome to set aside.

How Does It Work?

When a Fixed Deposit is made in the name of a child, either parent can be named a guardian. The natural/ legal guardian of the child will be required to furnish his ID, Address Proof, and all other documentation needed.

This investment cannot have a joint holder or a nominee. The guardian remains in charge of the deposit until the child becomes 18 years old. The child receives all interest earned on the FD on maturity. On turning 18, all the responsibilities shift to the child, and he becomes wholly and solely responsible for the handling of the Fixed Deposit and the tax liabilities associated with it.

Tax Implications of this FD

The interest income on bank fixed deposit in the name of your minor child is added to the income of the parent/guardian and is fully taxable. For example, if the interest rate is 8% and your tax bracket is 30%, then the effective rate of interest is only 5.6% after taxes.

Special FDs like Sukanya Samriddhi Account

Sukanya Samriddhi Account is a saving scheme initiated to target the parents of the girl child launched by the Government of India in January 2015. It aims to give an impetus to building a future fund for education and marriage expenses of the girl child. The interest rates applicable may change from time to time. The account opening is possible at any India Post office or branch of authorised commercial banks.

Advantages of FDs for Kids

Opening a fixed deposit for your kid as soon as he /she is born is a great way to take advantage of the power of compounding. The higher number of years will give a greater chance of compounding the principal amount or monthly deposits. Compounding adds interest on interest and the principal amount usually quarterly. For a child who will use this amount only when he’s 17 or 18 years of age, this time period can result in a substantial amount which can hopefully suffice for both education and marriage.

Learn more about how does bank calculate interest on FD(Fixed Deposits) and also get to know what is an FD

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