With advancements in banking technology, there are different types of savings accounts that are available to the people. One such type of savings account is a kids bank account. A Kids Bank Account is an account that can be operated by a child below 18 years. The child can thus imbibe a financial savings habit from early on.
Features of a Kids Bank Account
- This bank account can be opened for children below 18 years. For children below 10 years, the account can be opened but can’t be operated by the child unless it is jointly operated by the parent or legal guardian. Once the child crosses 10 years, he can manage the account.
- The kids bank account becomes inoperative after the child becomes a major. However, banks give the accountholder an option to convert their kids bank account into a regular savings account.
- The child gets some of the features provided in a regular Savings Account such as cheque book, pass book and ATM card. However, these come with restrictions.
- The kids bank account is linked to the parent or the legal guardian’s account. Each month or at a fixed interval, a sum of money is debited from the linked account to the kids bank account. This way, there is always balance in case the child spends money on the debit card. This linking feature is not available in all Banks.
- Each bank has its own limits on the ATM withdrawal allowed and the per day spend allowed in a kids bank account. These safeguards prevent misuse of this account and the possibility that the child will spend more money than a particular limit.
- The bank may provide a login Id and a password so that the child can operate internet banking. However, the bank usually gets a signed mandate from the parent or legal guardian before it issues the login ID and password.
- These accounts must have a certain minimum account balance. The minimum account balance differs from bank to bank. In case the minimum bank account is not met, the bank charges a penalty.
- The bank sends an SMS to the parent or legal guardian every time a transaction is performed in relation to the kids bank account. This helps maintain control.
How to open a savings account for kids
The procedure on how to open a kids bank account is extremely simple. The first step is to find out which bank to open the account with. It is better to open a savings account in a bank in which the parents or the legal guardian have an account. This helps the bank to link the two accounts and to put in a standing instruction to auto debit the parents or guardian’s account for funds (if linking facility is available).
Once the bank is decided, the account can be opened by filling up an account opening form on the bank’s website. Once this form is filled up, someone from the customer care department of the bank will contact you to get documents from you. Some of the documents required are:
- KYC documents for parent or legal guardian
- KYC documents for child
- Passport size photographs of the child
- Duly completed application form
In case an online application procedure is not possible, you can visit a branch, fill the form and submit the documents to open a new account.
Benefits of Kids Bank Account
- A kids bank account is an excellent way to teach your child fiscal responsibility. Through this bank account, your child can learn how to operate a bank account, especially when the funds are limited.
- This account teaches a child the value of budgeting since there is a limit on the transactions that can be done every day. There is also a limit on the funds in the account and a minimum account balance that has to be maintained.
- Some Banks provide free insurance for the child on opening the kids bank account
- Banks may have auto sweep in facility that converts excess balance into a fixed deposit so that the earnings on the account are maximized.
Kids Bank Account Tax Implications
As per the Income Tax Act, 1961, a child’s income from investments made in his name by parents is clubbed with the parent’s income. Unless the income is from the child’s own skills, in which case it is taxed in the child’s name.
Whatever interest is earned on the savings account balance or the fixed deposit through sweep in, will be clubbed with the parent or the legal guardian’s income. This income is clubbed with the working parent’s income. In case both the parents are working, this income is clubbed with the parent whose income is higher.
However, the Income Tax Act also exempts Rs. 1,500 per child for clubbed income. This provides a little bit of relief from taxation. It is important to consider children’s bank account tax as well before opening the account. However, the benefits of opening an account and teaching your child financial lessons trumps the amount paid in terms of tax on savings bank account interest.
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