Fixed Deposit for Child Plans

Table of Content

1. Why Choose a Fixed Deposit for Your Child?

2. Benefits of Fixed Deposit Schemes for Children

3. How to Choose the Right Fixed Deposit Plan for Your Child

4. Tax Rules on Fixed Deposit for Minors

5. Who Can Withdraw from a Child FD Scheme?

6. What Happens to the FD When the Child Turns 18

7. Documents required for a Fixed Deposit for a Child

8. How to Open a Fixed Deposit for Child

9. Summary

10. FAQs on Fixed Deposit for Child

Why Choose a Fixed Deposit for Your Child?

1. To Secure Their Future Savings

Right from the day your child is born, you need to start financial planning for their short as well as long term future, such as schooling, life insurance, higher education, and marriage. That is where opting for a specific child investment plan in the form of a fixed deposit for a child can help you secure your children's future and save a considerable amount for each stage of their life.

2. To Make a Profit on Your Investment

Given that fixed deposits offer you a fixed interest rate as a return on your investment, you are most likely to make a profit from your FD once it matures. Unlike market linked investment options such as mutual funds, stocks, etc, or gold and real estate, which have their own share of ups and downs, fixed deposits offer you guaranteed returns along with profit, as the amount upon maturity is more than the principal invested.

3. To help your child learn about managing money responsibly

Until your child reaches maturity age, you, as a parent or guardian, open and operate the FD account. But when your child reaches maturity age, he/she will operate the account and can choose to either continue the investment or redeem the FD. This way, the responsibility of managing the FD or even the maturity amount upon redemption is what helps your child learn about how to manage money from a young age.

Benefits of Fixed Deposit Schemes for Children

Fixed deposit for a child offers a constant interest rate throughout the term, irrespective of variations in market performance. This makes it a certain form of savings for children, such that they know the amount of maturity well in advance. 

Here are the different benefits of a fixed deposit for children:

• Guaranteed Returns

Fixed deposits provide guaranteed returns by offering a fixed interest rate that remains unchanged throughout the entire tenure. This ensures that the investor receives a predictable and stable income, unaffected by market volatility or economic fluctuations, making fixed deposits a secure and reliable investment option for consistent growth.

• Flexible Tenure Options

Parents may choose to deposit for periods as short as 7 days to as long as 10 years based on their needs, whether for school fees or higher education. Moreover, this flexibility enables customising investment horizons to suit a child's age and other expected financial requirements.

• Low Minimum Investment

A fixed deposit for a child can be initiated with a minimal opening amount, based on the bank. The low entry cost makes FDs a convenient savings product for families across all income levels. This affordability encourages early financial planning for children with minimal upfront commitments.

• Risk-Free Investment

FDs do not link to stock markets or mutual funds, so market fluctuations do not affect the invested amount. The RBI regulates most banks and financial institutions that provide FDs, ensuring compliance and stability. The Deposit Insurance and Credit Guarantee Corporation (DICGC)^{^^}, a subsidiary of the Reserve Bank of India, insures deposits up to ₹5 lakh, making FDs a safe and reliable investment option for children’s savings.

• Online and Offline Access

Parents may open and operate child fixed deposit plans both online and at physical bank branches. This two-level accessibility offers convenience and flexibility. It allows parents to monitor and update accounts easily without relying on a single mode of operation.

• Premature Withdrawal Facility

Most banks permit premature withdrawal of fixed deposits against a nominal penalty on the interest accrued. This facility proves useful during unexpected financial needs. It balances investment discipline with liquidity in emergencies.

• Auto-Renewal Option

Banks usually provide automatic renewal of a fixed deposit for a child at maturity. This facility enables seamless savings without the need for renewal each time. It is especially helpful for long-term child savings plans that span several years.

• Nomination Facility

A fixed deposit scheme for a child offers the facility of nominating a beneficiary. If the account holder dies, the bank transfers the money to the nominee. This ensures the child’s savings pass legally and without hassle to the designated person.

How to Choose the Right Fixed Deposit Plan for Your Child

Choosing the best fixed deposit plan for a child involves evaluating several key factors to align the investment with your financial goals and needs.

1. Tenure Flexibility

The optimum FD term varies based on your child's milestones in finances. For instance, if the objective is to finance a college education at age 18, choosing a term that aligns with this timeline ensures maturity at the correct moment. 

Lower tenures suit school-related expenditures. Extended tenures of 5–10 years are suitable for long-term goals, such as marriage or pursuing international education. If your child is 10 years old and you plan to fund their university costs at age 18, an 8-year FD will mature right on time. 

This ensures the funds are ready when needed. For schooling purposes, such as extracurricular fees or annual tuition, you can choose a 3-year FD. This option helps cover shorter-term educational expenses efficiently.

2. Minimum and Maximum Deposit Limits

Banks usually set minimum deposit amounts ranging from ₹100 to ₹1,000 for child fixed deposit plans, while the maximum can go up to several lakhs. Therefore, understanding these limits helps assess the plan’s accessibility and whether it fits your current budget and future savings capacity. 

For instance, if a bank’s minimum deposit limit is ₹500 and the maximum is ₹5 lakh, parents with a modest budget can start small and gradually increase. Conversely, those with surplus funds can invest a lump sum upfront to maximise interest earnings over the chosen FD tenure.

3. Premature Withdrawal Rules

Although the majority of banks permit early withdrawal from a fixed deposit for a child, it typically comes with a penalty. This aspect may be beneficial in times of financial crises, but should not be taken as a key advantage. 

For instance, if you place a 5-year FD at 7% interest and withdraw it after 3 years due to an emergency, the bank reduces the rate to 6% (tentatively). It also imposes a penalty on the withdrawal. Going through such norms in advance prevents sudden slashes in returns in desperate situations.

4. Lock-in Period

A lock-in period prevents withdrawal of the deposit prematurely before a specified time. All child fixed deposit plans do not have lock-ins, but a few long-term or tax-saving FDs may have lock-ins. 

For example, a 5-year tax-saving FD with a lock-in period will not permit withdrawal before maturity. So, parents cannot withdraw money if they need it urgently after three years. Being aware of such constraints beforehand assists in deciding whether to opt for a lock-in FD or go for one that is less rigid.

5. Payout Options

FDs typically provide two types of payouts, cumulative and non-cumulative. Cumulative FDs allow interest compounding and payout at maturity, best for long-term growth. Whereas, non-cumulative ones pay interest on a monthly, quarterly, or yearly basis, yielding periodic returns. Select the type of child FD plan based on whether you require interim cash flows or are concerned with long-term savings.

For instance, parents setting up a child's college fund could opt for a cumulative FD so that the interest is compounded up to maturity. A family needing regular income for school fees can opt for a non-cumulative FD that pays interest quarterly. This option provides constant cash flow while keeping the principal amount intact.

6. Safety of the Bank

Check if the bank or NBFC is regulated by the RBI. Deposits of ₹5 lakh per depositor per bank are insured by the DICGC. This adds an extra layer of safety while choosing a financial institution.

For example, when you open a fixed deposit for a child in an RBI-regulated bank and the bank runs into financial difficulties, deposits for up to ₹5 lakh are insured by DICGC^{^^}. Such a guarantee encourages parents to place funds in known banks or NBFCs, reducing risk and ensuring the child's savings against any unplanned event.

Interest accrued on an FD deposited in a minor's name is subject to tax. If the child is under 18 years, the Income Tax Act requires clubbing the interest income with the income of the parent who earns more. The income is then taxed according to that parent's slab rate.

Tax Rules on Fixed Deposit for Minors

Interest earned on fixed deposits opened in a minor's name is taxable as part of the parent's income under the Income Tax Act. This means the interest is "clubbed" with the parents' earnings and taxed according to their income slab.

Tax Deducted at Source (TDS) is applied if the total interest from all fixed deposits held in the child’s name exceeds ₹40,000 in a financial year (₹50,000 for senior citizens). To avoid unwanted TDS deduction, eligible parents can submit Form 15G (for non-senior citizens) or Form 15H (for senior citizens) to the bank.

Only 5-year tax-saving fixed deposits qualify for deductions under Section 80C^##, up to ₹1.5 lakh per year. However, these FDs are generally held in the parents' name, not the minors. Knowing this distinction helps parents plan their investments and avoid unexpected tax deductions.

Who Can Withdraw from a Child FD Scheme?

A fixed deposit for a child is usually run by the parent or legal guardian until the minor attains the age of majority. Moreover, the legal guardian can deposit, renew, and, at the bank's option, apply for premature withdrawal on behalf of the child. 

Upon reaching the age of 18 years, operational control often shifts to the account owner. They can now withdraw, renew or transfer the child FD plan according to the bank's guidelines. Furthermore, the guardian can approve a pre-maturity withdrawal before the child reaches the age of majority. The issuing bank’s policy may permit it, but could impose interest charges. 

Nomination and joint operation rules vary across banks, so it is important to check the specific bank’s policies for authorised signatories and documentation. Child FDs should not be confused with government schemes like girl child savings plans or scholarships, which have different eligibility and withdrawal conditions.

For example, if a guardian opens a 7-year FD for a 12-year-old, they can manage it until the child turns 18. At that point, the bank will require the child’s KYC documents to transfer control. The child can then choose to renew, withdraw, or reinvest the FD.

What Happens to the FD When the Child Turns 18?

At the age of 18, control over the fixed deposit generally passes from the guardian to the account holder. Banks demand new KYC documents, which usually include the adult child's PAN, Aadhaar, proof of date of birth, and specimen signature, before facilitating the transfer of operation. Upon verification, the bank transfers the fixed deposit for the child into their name.

After the ownership transfers, the adult, now holding the funds, can withdraw the maturity proceeds, extend or invest in a fresh FD, or retain the current deposit in their account. The bank charges any interest earned after the transfer against the child's PAN and taxes it at the prevailing slabs.

Parents must update their nomination and contact information proactively and check certain documents and procedures with the issuing bank. This is because precise requirements and timelines differ with each bank. Moreover, PAN linkage should be completed at the earliest.

For example, if a 17-year-old’s FD matures after their 18th birthday, the bank will request their PAN, Aadhaar, and signature for verification. Once updated, the now-adult can withdraw the funds for education, renew the FD for another term, or invest the maturity amount in a different savings instrument.

While fixed deposits are a good start, for comprehensive protection and guaranteed returns, explore our range of child savings plans. Click here to learn more and get a free consultation.

Documents required for a Fixed Deposit for a Child

Below mentioned is the list of documents required to invest in a fixed deposit for child:

1. The minor child’s date of birth

2. Parent/guardian’s PAN card number

3. Parent/guardian’s Driving License/Voter ID/photocopy of Passport/Aadhar Card

4. Parent/guardian's address proof

How to Open a Fixed Deposit for Child? 

A parent/guardian can decide to open a fixed deposit for a child by following these steps:

• Step 1

Visit either the official website or branch of the respective bank or NBFC. You can also choose to use online net banking.

• Step 2

Enquire about the FD investment at the branch, or click on the Fixed Deposit section on the website or net banking of the bank or NBFC.

• Step 3

Now, enter all the details of both the child as well as the parent/guardian wherever required.

• Step 4

Carefully upload all the required documents, including photographs, ID proofs, etc., and complete the KYC.

• Step 5

Once you have duly filled out the application, the respective bank/NBFC will verify all the details you provided.

• Step 6

After completion of the verification of the information and proofs, your fixed deposit for child gets opened.

Summary

Many banks and NBFCs (Non-Banking Finance Companies) have been offering lucrative interest rates on FDs that can help financially secure your child's future. The key benefits of fixed deposits for children include risk-free and guaranteed returns, a wide range of deposit tenures from 7 days to 10 years, the option to open FD for children aged as low as one year old, etc. But before you hop onto the decision to invest in these, make sure you have clear financial goals in mind, as well as the investment horizon, expected returns, etc. You can also consider child insurance plans and child savings plans when planning to secure your child’s future financially in case of your untimely demise.

Check out our HDFC Life Click 2 Achieve Plan^{^} savings plans that can save for your child’s future.

FAQs on Fixed Deposit for Child

Q: What is a Fixed Deposit (FD) for a child?

FD (Fixed Deposit) plans for children are special investment schemes offered by banks, NBFCs, and post offices. Parents/guardians of the child can deposit money in such schemes on behalf of the child, who, upon maturity, receives the corpus.

Q: What is the minimum & maximum tenure for a child Fixed Deposit?

The minimum and maximum tenures for child FDs usually range between 7 days and 10 years.

Q: Are the returns from a Fixed Deposit for a child taxable?

Yes. Returns from FD, even those opened in the name of a minor child, are taxable as per your income tax slab's applicable rate after adding the credited interest as additional income.

Q: What should I consider before opening a Fixed Deposit for my child?

If you want to choose a safe investment option to secure your children’s future, you can opt to open fixed deposit for child. But make sure you are clear about your financial goals, investment tenure, expected returns, taxability, etc, before opening the fixed deposit.

Q: What is the minimum age for FD?

Parents/guardians can open a fixed deposit for a child who is aged as young as just one year old.

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