Investing early in life is one of the most effective strategies to secure a financially stable future. One of the simplest and safest ways to do this is through Fixed Deposits (FDs). Explore the benefits and mechanics of fixed deposits for children. Learn how starting early could yield substantial returns and pave the way for a financially secure adulthood.  

Why Choose Fixed Deposits for Children?

FDs are a popular savings tool in India due to their safety, assured returns, and simplicity. When it comes to saving for children, these features make FDs particularly attractive. Here are some reasons why parents could consider FDs for their children:

• Safety and Security: FDs are considered one of the safest investment options as they offer guaranteed returns. Unlike stocks or mutual funds, FDs are not subject to market volatility.
• Assured Returns: The interest rate on an FD is fixed at the time of investment and remains constant throughout the tenor. This predictability allows for clear financial planning.
• Flexible Tenor: Parents can choose the tenor of the FD according to their financial goals. This could be between 7 days and 10 years.
• Compounding Benefits: By starting early, the power of compounding can significantly enhance the maturity amount. This is particularly beneficial for long-term goals like higher education or marriage.
• Ease of Investment: Opening an FD account is a straightforward process, and many banks and NBFCs offer special schemes for children.

How to Open a Fixed Deposit for Children

Opening a fixed deposit for children involves a few simple steps. Most banks and NBFCs require the following:

• Age Proof of the Child: This can be the birth certificate or school ID.
• KYC Documents of the Parent/Guardian: These include PAN card, Aadhaar card, and address proof.
• Initial Deposit: The minimum deposit amount varies by institution.

Though, these parameters may vary among FD issuers. Check the requirements beforehand for a smooth investment process. 

Benefits of Starting Early

The earlier you start investing in a fixed deposit for children, the more you benefit from compounding interest. Here are some key advantages of starting early:

• Longer Investment Horizon: Starting early means a longer period for the investment to grow, maximising the benefits of compound interest.
• Financial Discipline: Regularly investing in FDs instills a sense of financial discipline and saving habits in children.
• Achieving Long-term Goals: Early investments can help in achieving significant milestones like funding higher education or marriage expenses.
• Risk Mitigation: Investing in FDs reduces the risk exposure compared to other high-risk investment options.

Tax Implications

While FDs are a safe investment option, it’s important to be aware of the tax implications. The interest earned on FDs is taxable under the head “Income from Other Sources.” However, there are some exemptions and provisions that parents can leverage:

• Tax Deducted at Source (TDS): Issuers deduct TDS at 10% if the interest earned exceeds ₹40,000 in a financial year (₹50,000 for senior citizens). Parents can submit Form 15G/15H to avoid TDS if their total income is below the taxable limit.
• Clubbed Income: If the FD is in the name of a minor, the interest earned is clubbed with the parent’s income and taxed accordingly. However, parents can claim a deduction of ₹1,500 per child per year under Section 10(32) of the Income Tax Act, 1961.

Choosing the Right FD Scheme

When selecting an FD scheme for children, parents should consider the following factors:

• Interest Rates: Compare the interest rates offered by different banks and NBFCs.
• Tenor: Choose a tenor that aligns with your financial goals.
• Credibility of the Institution: Ensure the bank or NBFC is financially stable and has a good track record.
• Premature Withdrawal Facility: Some FDs allow premature withdrawal with or without penalties. This can be useful in case of emergencies.

Booking a fixed deposit for children is a prudent financial decision that could yield significant returns over time. By leveraging the power of compounding and using tools like an FD return calculator, parents can plan and secure a financially stable future for their children. Early investments not only help in achieving long-term financial goals but also instill a habit of saving and financial discipline from a young age. Understanding the various schemes, tax implications, and the benefits of starting early can guide parents in making informed investment decisions.