Last year, Priyanka Jain, 37, an IT consultant residing in Delhi, was thinking of gifting something unique to her two kids, Joy Jain, 8, and Freya Jain, 9, for Children’s Day. She looked for a product that would teach her kids the importance of savings and give them a head-start in building a strong financial foundation. So, she decided to gift a bank savings account to both the children based on the advice given by her financial advisor.
Says Priyanka, “Both kids loved to save the cash received on special occasions – festivals, birthday, etc. – apart from the monthly pocket money and keep it in a piggy box from an early age. So, a savings account with a bank seemed like a perfect gift for children nearing their teens to make them learn about banking.”
There are savings accounts on offer for minor children as well, with such facilities as ATM withdrawal via own debit cards. Here is what you must know about children’s savings accounts.
What is it about?
In early 2014, the Reserve Bank of India (RBI) allowed banks to offer savings accounts to minors. Since then, several private and public sector banks have been offering savings bank accounts aimed specifically at children. State Bank of India (SBI) has two different bank accounts Pehla Kadam and Pehli Udaan, HDFC bank has Kids Advantage, Kotak Mahindra Bank has My Junior and Axis Bank has Future Stars Savings.
ICICI Bank and SBI offer two variants of savings accounts for minors. One type of account is for those below 10 years and the other is for kids aged 10 to 18. The parents or a guardian jointly operates an account opened for a child who is below 10 years. A child between 10 and 18 can operate the bank account independently. However, when a child turns 18, the savings account becomes dormant and needs to be converted to a regular savings account to continue getting the benefits and interest.
To open a savings account for a minor child, a bank may ask for a few documents. These include a recent photograph of the applicants, proof of date of birth of minor (birth certificate issued by Municipal Corporation or Passport), proof of relationship between the parent/guardian and the minor applicant (ration card or life insurance policy), PAN of the parents/guardian and address proof.
These bank accounts provide facilities such as internet banking, debit card, ATM usage, cheque book, passbook, just like regular savings accounts. Interest earned from savings in the account is 3-4.5 per cent. Facilities such as internet banking and debit card transactions are restricted and safeguarded from misuse by the bank. For instance, a Pehli Udaan account holder has a transaction limit of Rs 5,000 for internet banking and Rs 5000 per day as withdrawal limit using the debit card to take money from ATMs and for shopping at point of sale (POS) terminals.
These accounts have a minimum average balance. Some banks offer total waiver of the minimum average balance or keep it to as low as Rs 500.
Why a children savings account?
Suresh Sadagopan, Founder of Ladder7 Financial Advisories, says, “While operating such a bank account, a child feels a sense of responsibility, operational independence, ownership with his/her account. So, he/she operates it diligently and learns from parents.”
After opening the savings account for both Priyanka’s children have taken keen interest in visiting the bank with their father for depositing cash from the piggy bank regularly, updating the passbook, withdrawing money from the bank teller, etc. Then they would ask several questions about how a bank operates.
Raj Khosla, Managing Director and Founder, MyMoneyMantra, says, “With this practical banking exposure, we are introducing our children to modern-day banking at an early age. So, they can learn from their mistakes, understand the power of savings and become accountable while spending.”
Some banks offer an auto-sweep facility, which allows any amount in excess of the minimum balance to be swept into a fixed deposit that earns a higher interest rate compared to a savings account. Priyanka has activated this facility in the children’s accounts.
The interest earned from the children’s savings account through fixed deposits is clubbed with the income of the parent whose income is higher and taxed accordingly. However, the parent can claim an exemption of Rs 1,500 for each minor child whose income is clubbed.
She has identified particular goals and prioritized them with inputs from both the children. These goals are short-term (1-2 years’ time span) in nature. So, she has linked these accounts to a recurring deposit and is looking to build a corpus for her children’s goals from their respective bank accounts. Says Raj, “By carrying out such an exercise, children learn the importance of identifying goals and investing the surplus amount from their own savings accounts to achieve them.”
Care parents must take
You should ideally be choosing a savings account for a child that has the lowest minimum balance criterion so that the money is not unnecessarily locked at a very low interest rate. Also, you should choose an account that puts restrictions on expenditure/withdrawal through the debit card.
Says Suresh, “Banks are basically engaging a child (potential customer) at an early age of 8 to 10 years to reap benefits in the future. So, when this child commences work and starts earning, he/she will continue banking with same bank if he/she had a decent experience with the services offered during the teenage years.” Avoid opening an account for your child in co-operative banks, if such options are offered by them. Examine the services offered by a bank and its management. Get feedback from existing customers about a bank/branch, etc. before zeroing on particular option.
Parents need to be cautious while handing over the debit card to their teenage children without periodically monitoring their spending habits. With freedom must come responsibility. Chenthil Iyer, Chief Strategist at Horus Financial Consultants, says, “Such freedom may make the child take accessibility of money for granted and develop the wrong money habits. Remember, this account is being opened with the primary intention of educating children about the importance of saving and investing and not to make them shop irresponsibly!”
The savings account for children is only a tool that provides practical exposure to financial education. However, just opening such accounts without imparting the right education may result in more harm than good to your children. Says Chenthil, “Now-a-days, children don’t follow what parents say unless they see parents doing it themselves. So, the parents need to take extra efforts to include children in their own budgeting and investing decisions and show them how they arrived at their decisions than just preach.” Also, parents need to have periodic discussions with their children about what they are doing with the bank account, analyse spends and discuss with the children, prepare a budget, keep a track of the expenses, etc.
Also, teach your child about online safety while transacting using the internet banking facility. Explain the importance of a secure password, PIN used for internet/mobile banking, one-time-password (OTP), etc.
The key advantage of these savings accounts is that the children grow beyond ‘hoarding’ money in piggy banks and start participating in the larger financial system. Children also learn the concept of interest and returns in a practical manner. Kids also get to learn the procedural aspects of banking. Over time, you can also teach them how to save for small-value goals. We all make mistakes with money management and learn. A kid’s savings account could set the tone for your child’s healthy saving habits in later years, if guided well.