Third-party investing or gifting is complicated
While insurance policies cannot be gifted to anyone except one's own children, bank FDs and mutual funds need additional paperwork
 "Third-party investing or gifting is complicated")
Want to gift a financial investment like mutual fund or insurance policy or bank fixed deposit (FDs) to your niece or nephew? The answer: You can’t gift him an insurance policy but if you are willing to do some additional paperwork, lumpsum investment in mutual funds and bank FDs would be a good choice.
In the case of bank FDs, you can open it in your name and the receiver jointly. You will need to complete the Know Your Customer (KYC) procedure for both account holders. If the receiver is a minor, it is unlikely that he or she will have proof of KYC. So, you can be the guardian. When the FD matures, the bank will cut the Tax Deducted at Source and pay proceeds to the recipient. In case of a minor, you can claim a tax refund. If the receiver is a major the proceeds will be added to his/her income and taxed.
In the case of bank FDs, you can open it in your name and the receiver jointly. You will need to complete the Know Your Customer (KYC) procedure for both account holders. If the receiver is a minor, it is unlikely that he or she will have proof of KYC. So, you can be the guardian. When the FD matures, the bank will cut the Tax Deducted at Source and pay proceeds to the recipient. In case of a minor, you can claim a tax refund. If the receiver is a major the proceeds will be added to his/her income and taxed.
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In case of MFs, you can have the child and his/her parents as applicants and give a third-party declaration saying you are investing on the child's behalf.
“Also a letter is required saying that that you are making the investment in the child's name, so that he/she can have a proof of the source of the money, says Suresh Sadagopan, founder, Ladder7 Financial Advisory. The limit, however, is Rs 50,000. Lumpsum would be preferable in this case, because if you want to do it through the systematic investment plan route, you will have to sign the third-party declaration form every month — a process that would discourage many.
According to tax rules, there is no gift tax, if you gift money to a blood relative. Relative is defined as spouses and their siblings, children, grandchildren, grandparents, siblings and their spouses, parents' siblings and their spouses. So, a gift to your nephew/niece will not attract gift tax in his/her hands. But if your children were to gift their cousins, then the receivers would be taxed if the amount exceeds Rs 50,000 in a year.
In case of a Hindu Undivided Family, any gift received by the HUF is also exempt from tax, says Sanjeev Gokhale, a Mumbai-based chartered accountant.
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In case of insurance policies, it is difficult to invest in the name of a third party. You can be the proposer for a life insurance policy only for your spouse, children or in some cases grandchildren. Children or grandchildren cannot gift their parents or grandparents.
“You need to show the insurable interest, which means that in case of death of the person you should have provable or potential economic loss. Even in case of grandparents buying policies for their children, there has to be proof to show that there is some economic dependence on the grandparents. For instance, the grandparent is paying the child's fees. If you want to gift to another relative the only way is to buy the policy in your name and gift the proceeds,” says A S Narayanan, founder & CEO Reach Ajcon Financial Advisors. In case of other relatives, even siblings, it is seen as a moral hazard, as there could be chance for foul play.
“You need to show the insurable interest, which means that in case of death of the person you should have provable or potential economic loss. Even in case of grandparents buying policies for their children, there has to be proof to show that there is some economic dependence on the grandparents. For instance, the grandparent is paying the child's fees. If you want to gift to another relative the only way is to buy the policy in your name and gift the proceeds,” says A S Narayanan, founder & CEO Reach Ajcon Financial Advisors. In case of other relatives, even siblings, it is seen as a moral hazard, as there could be chance for foul play.