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People often choose to invest money in a family member's name rather than their own for broadly three reasons:
-
Reducing income tax liability
-
Simplifying estate planning
- Securing children's financial future
Let's explore each of them in detail.
#1 Reducing income tax liability
Investing in the name of a family member who may have no source of income can help you save tax. Suppose you invest in the name of your spouse or child who has no income. In that case, the income that accrues might be taxed at a lower slab rate.
However, keep in mind that the government has enacted clubbing provisions in the Income Tax Act to prevent this practice.
Nevertheless, there are three cases where clubbing provisions become applicable. Which means you will need to pay tax on the total income earned.
The table below summarises the same.
Three cases where clubbing provisions are applicable
| Investor (the one to whom the money actually belongs) | Investing in the name of | Who pays the tax? |
|---|---|---|
| Husband/Wife | Spouse | Husband/Wife (whoever invests the money) |
| Parent | Son's wife (Daughter-in-law) | Parent |
| Grandparents, parents or anyone else in the family | Minor | Parent with the higher taxable income |
If you still decide to invest in a family member's name, here is the process to go about it:
| Type of investment | How to invest |
|---|---|
| Investing in stocks and mutual funds |
For stocks, brokers require a demat account linked to your family member's bank account.
For mutual funds, if you don't want to invest via the demat route, then you may invest directly with AMCs. AMCs also take investment only from the bank account of the person in whose name investment has been made, barring a few exceptions as in the case of a minor. Hence, two options emerge (this applies to both stocks and mutual funds): Create a new bank account, set up a trading and demat account or an account with AMC for your family member, complete the KYC and manage the investment yourself or Open a joint bank account from where the money will flow for the investments and make your family member the primary holder. |
| Bank FDs |
Transfer money to your family member's bank account and ask them to start an FD in their name
or Open your family member's bank account and transfer funds from your account to start an FD in the family member's name. |
| Real estate | There are no restrictions, as you are free to buy and sell property directly between parties |
However, if you decide to invest in a family member's name to snag those lower taxes, keep in mind that the ownership of the asset will belong to the person in whose name the investment is made.
#2 Streamlining estate planning
It is not uncommon to see loved ones embroiled in ugly succession disputes after a family member's passing. Further, creating a Will comes with its legal hassles and twists. And while nomination seems like the better option, a Will still supersedes it
If you want to bypass the red tape and avoid the mess that comes with investment transfers , you may want to directly invest in your family member's name. But there is a catch - once you make an investment in someone's name, you cannot change anything without their permission.
When it comes to real estate, nomination facilities are not available. Thus, to ensure seamless asset transfer, either draft up a Will or go old school by directly investing in the family member's name.
#3 Securing children's financial future
While investing in your child's name might seem like the best method to secure their financial future, it comes with its fair share of hassles. This process involves significant paperwork, from providing documentation to proving parent-child relationship to transition from minor to major.
The solution? Start an investment in your name and make your child the nominee. This saves time, as you don't need to go through the hassle of documentation or open a separate bank account for your child. To understand more about it, click here .
Our take
While investing in a loved one's name might appear to be a smart financial move, it has certain limitations. To make an informed decision, it's best to weigh the pros and cons and be aware of the legal and financial implications that come with it.
Also read: Can you gift a mutual fund to someone?
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