What you will learn: how bank, mutual fund, demat and small-savings accounts work in a child's name, who can operate them, how Sukanya Samriddhi and NPS Vatsalya fit in, why a child's income is usually taxed in a parent's hands, how gifts are treated, and exactly what changes when the child turns 18.
Sneha and Rohan Deshpande (illustrative profiles) live in Nashik with their son Ved, 7, and daughter Isha, 2. Sneha's mother wants to give Ved ₹5 lakh "for his future", relatives keep handing the children cash on birthdays, and a colleague has told Rohan that investing in the children's names "saves tax". Their real question: should we save in the children's names or our own, which accounts can a child even hold, and what happens to this money when they grow up?
First decide: whose money is it?
Money put in a child's name legally becomes the child's. Money kept in a parent's name and "earmarked" for the child stays the parent's. Both are sensible, for different jobs.
| Question | In the child's name | In a parent's name, earmarked |
|---|---|---|
| Who owns it? | The child; the guardian only manages it | The parent |
| Who controls it after 18? | The young adult, once their own KYC is done | The parent |
| Can it be used for another family need? | Only for the child's benefit; it is not the parent's to take back | Yes, if plans change |
| Tax on income while the child is a minor | Usually added to a parent's income (clubbing) | Taxed as the parent's own income |
| If the parent dies | Stays with the child; a guardian manages it | Passes through the parent's nomination and Will |
Many families use both: gifts and child-specific schemes in the child's name, and most education money in a parent's name, where it can be redirected if plans change. How to size and time that education money is covered in your child's education, in India and abroad; this lesson is about the accounts, the tax and the handover.
Accounts a child can hold
Bank accounts
Under the Reserve Bank's directions of 21 April 2025 (banks had to align their policies by 1 July 2025), a minor of any age can open a savings or term deposit account through a natural or legal guardian, and can open one with the mother as guardian. A child who is at least 10 may operate a savings or term deposit account independently if they wish, within amount limits and conditions each bank sets and must explain. Banks may offer such children net banking, a debit card or a cheque book. One rule is absolute: a minor's account can never be overdrawn.
Mutual fund folios
A child must be the sole holder of a mutual fund folio; joint holding with a minor is not allowed. The guardian must be a parent or a court-appointed guardian, and the fund house needs the child's date-of-birth proof. Since 15 June 2023, SEBI allows payment for the child's investment from the child's own bank account, a parent's or legal guardian's account, or a joint account of the child with the parent or guardian. Whoever pays, every redemption goes only to the child's verified bank account. Fund mechanics, costs and tax are in what is a mutual fund.
Demat accounts
A demat account can be opened in a minor's sole name, operated by a parent or court-appointed guardian; a minor cannot be a joint holder. Ask the broker what a minor's account may trade.
Public Provident Fund
A parent can open one PPF account for each minor child, but the ₹1.5 lakh yearly PPF limit covers the parent's own account and the child's together.
Schemes built for children: Sukanya Samriddhi and NPS Vatsalya
Sukanya Samriddhi Account (SSY)
The rules come from the Sukanya Samriddhi Account Scheme, 2019:
- Who: a guardian opens it for a girl under 10. One account per girl, and normally at most two girls per family, with an exception for twins or triplets.
- Deposits: at least ₹250 and at most ₹1.5 lakh in a financial year, for 15 years from opening. A year in default can be regularised by paying the ₹250 minimum plus ₹50 for each such year.
- Interest: set by the government every quarter; 8.2% a year for October to December 2026. It is not fixed for the life of the account.
- Withdrawal: up to 50% of the balance at the end of the previous financial year, for her education, once she turns 18 or passes Class 10, whichever is earlier, against an admission offer or fee slip and limited to the actual fees.
- Closure: at maturity, 21 years after opening; earlier on her marriage after 18 (applied for between one month before and three months after the wedding), on her death, or on extreme compassionate grounds after five years.
Payments from the account are tax-free under the Income-tax Act, 2025 (Schedule II). A deduction for deposits is available only in the old tax regime; regime choice is covered in old versus new regime.
NPS Vatsalya
NPS Vatsalya is a pension account in the child's name, run by a guardian until 18, with limited access before then and the young adult's own choices after. It is a head start on retirement, not an education fund. The full rules, tax and the choices at 18 and 21 are in NPS Vatsalya.
Tax: clubbing and gifts
A minor's income is usually taxed in a parent's hands
Section 99 of the Income-tax Act, 2025 adds the income of a minor child to a parent's income. If the parents are married, it goes to the parent whose income (before adding it) is higher; if they are not, to the parent who maintains the child that year. Three kinds of income stay with the child: income from the child's own manual work, income from the child's own skill, talent or specialised knowledge (a young actor's or chess player's fees, for example), and the income of a child with a disability of the kind specified in the Act.
The source of the money does not matter. Interest on an FD funded by a grandparent's gift, dividends and capital gains on a child's mutual fund units are all clubbed. Because a clubbed gain becomes part of the parent's income, it generally shares the parent's yearly exemption for listed equity gains rather than getting a separate one. In the old regime, the parent can exclude up to ₹1,500 of clubbed income per child each year (Schedule III, entry 17). Section 202 withdraws that exclusion in the new regime, which is the default.
So the colleague is mostly wrong: while the child is a minor, saving in their name changes ownership, not tax.
Gifts to children
Money or property received from a relative is not taxed in the receiver's hands (section 92 of the 2025 Act). Relatives include parents, grandparents on both sides, siblings, and the siblings of either parent, among others. Gifts received on one's own marriage and under a Will or inheritance are also excluded. Gifts from people who are not relatives, such as family friends, are taxable in full once the total from such people exceeds ₹50,000 in a tax year. A tax-free gift can still produce clubbed income later. More examples are in gifting money to family and clubbing rules.
Worked example: the Deshpandes' two decisions
Decision 1: the grandmother's ₹5 lakh. Assumptions: the money goes into an FD in Ved's name at 7% a year, interest paid annually. Sneha earns more than Rohan, and her income is taxed at a 30% marginal rate plus 4% cess.
- The gift itself: not taxed, because a grandmother is a relative.
- Interest each year: ₹5,00,000 × 7% = ₹35,000, added to Sneha's income.
- Tax in the new regime: ₹35,000 × 30% × 1.04 = ₹10,920 a year.
- Tax in the old regime: (₹35,000 − ₹1,500) × 30% × 1.04 = ₹10,452 a year.
An FD in Sneha's own name would cost the same ₹10,920. The real difference is ownership: in Ved's name the money is his, and from 18 he decides.
Decision 2: a Sukanya Samriddhi account for Isha. Assumptions: opened when she is 2; ₹60,000 deposited at the start of each financial year for 15 years (₹9 lakh in all); interest assumed at a steady 8.2% a year, compounded yearly. Rates change quarterly; this is an illustration, not a forecast.
| Point in time | At 8.2% a year | At 7% a year (lower-rate case) |
|---|---|---|
| Total deposited | ₹9 lakh | ₹9 lakh |
| Around her 18th birthday (16 years) | ≈ ₹19.4 lakh | ≈ ₹17.3 lakh |
| Most she could withdraw then for education (50%) | ≈ ₹9.7 lakh, capped at actual fees | ≈ ₹8.6 lakh, capped at actual fees |
| At maturity, 21 years after opening, if untouched | ≈ ₹28.7 lakh | ≈ ₹24.2 lakh |
The lesson: at 18, SSY can meet only part of college costs, and the account is then Isha's to operate. Plan the rest of the fee calendar separately.
What happens at 18
The 18th birthday is a legal handover; diarise it a year ahead.
| Account | What changes | What the young adult does |
|---|---|---|
| Bank account | The bank must record fresh operating instructions and a new specimen signature; if a guardian ran it, the balance is confirmed | Visit or apply as the bank asks; update KYC |
| Mutual fund folio | From the date of majority the guardian cannot transact; the folio is frozen and running SIPs, STPs and SWPs stop. The fund house should send notice about 30 days before | Get a PAN, complete KYC, convert or open a bank account in their own name, submit the change-of-status form with a nomination and fresh mandates |
| Demat account | Guardian details must go | Either open a new account and move the holdings, or sign fresh account documents with the same participant |
| Sukanya Samriddhi | She operates the account herself | Submit her documents to the post office or bank |
| NPS Vatsalya | No withdrawal until fresh KYC; a choice is due before 21 | Complete KYC and choose, as explained in the Vatsalya lesson |
| Income tax | Income after the 18th birthday is the young adult's own; in that tax year, income up to the birthday is generally still clubbed | Get a PAN and file a return where required |
Talk to the child first: an 18-year-old who suddenly controls ₹20 lakh should know what it was saved for.
Try this: a children's money check
- List every account, folio, policy and scheme held in each child's name, with the guardian recorded and the source of the money.
- For each, decide whether it truly needs to be the child's, or would be better earmarked in your own name.
- Check which parent's return should show clubbed income, and keep interest certificates and capital-gains statements for it.
- Note the source of each large gift (relative or not) in a simple file, in case you are asked later.
- Diarise each child's 18th birthday, with a reminder a year earlier for PAN, KYC and bank paperwork.
- If both parents dying would leave a child's money without a manager, read the guardianship lesson and name a guardian in your Wills.
Common questions
Can grandparents open a Sukanya Samriddhi account or a mutual fund folio for a grandchild?
Grandparents can give money, but accounts in the child's name are opened and run by a guardian: a parent, or a guardian appointed by a court. For mutual funds, SEBI's rules require a natural or court-appointed guardian. Grandparents can gift the money to the child, and the gift itself is not taxed.
Our 15-year-old earns from YouTube videos. Is that clubbed?
Income from a child's own skill or talent is not clubbed with a parent; it is the child's income. Keep records separating that income from interest on money the family has given, which is still clubbed. A chartered accountant can advise on filing.
If we separate, which parent pays tax on the children's income?
When the marriage no longer subsists, the income is clubbed with the parent who maintains the child in that tax year. Both parents should keep records of who is maintaining the child.
Where to go next
- Your child's education, in India and abroad: build the fee calendar this money has to meet.
- NPS Vatsalya: the pension account for children, in detail.
- Nomination, joint holding and ownership: line up nominees for the money in your own name.
- Further reading: Sukanya Samriddhi and mutual funds for a daughter's education.