Click here to get this post in PDF
A kid’s bank account is an important step towards financial literacy and real-world banking experience. It teaches them fundamental financial concepts, such as saving, spending, and managing money.
With facilities to open account online, parents can initiate these account applications without branch visits. However, understanding the features, requirements, and considerations is important to ensure the account aligns with your child’s financial goals.
Understanding kids’ bank account types
Typically, banks offer two variants of kids’ bank accounts, which are:
- Guardian-operated accounts: Meant for children under 10 years of age, these accounts are opened in the child’s name but are operated entirely by the parent or guardian. The child cannot make any independent transactions. All deposits, withdrawals, and transfers require a guardian’s approval. This is ideal for younger children who are beginning to understand money concepts.
- Self-operated accounts: Children aged 10-18 can operate this account. While the guardian can monitor, the child can conduct transactions independently using a debit card and digital banking platforms. This variant teaches practical money management skills while maintaining parental supervision. Most banks offer both types, allowing you to choose based on your child’s age and maturity level.
Interest rates and earnings
| Aspect | Details |
| Interest Rate | Up to 6.50% per annum |
| Calculation Method | Calculated daily |
| Credit Frequency | Credited monthly |
| Compounding Benefit | Monthly compounding increases growth faster |
| Example ₹50,000/1 year | ₹3,339 monthly compounding vs ₹3,325 quarterly compounding |
| Key Takeaway | Small monthly gains compounding to bigger long-term growth |
Taxation on minor account interest
Interest earned on a kid’s bank account is taxable under Indian income tax laws. Section 64(1A) of the Income Tax Act mandates that interest income from a minor’s account is clubbed with the parent’s or guardian’s income for tax purposes.
However, Section 10(32) provides partial relief by allowing an exemption of ₹1,500 per child per year, applicable for up to two children. Any interest earned beyond this threshold is added to the parent’s taxable income and taxed according to their applicable slab rate.
This tax treatment applies regardless of whether the parent or the child operates the account, as the law treats minor income as parental income for tax purposes.
Debit card options and limits
When you open an online account for a minor, banks typically offer a Visa debit card. The variants are:
- VISA Classic: It has a daily debit limit of ₹ 10,000, ATM withdrawals at any bank across India, ₹5 lakh personal accident insurance, ₹30 lakh air accident insurance, ₹4 lakh lost card liability protection, and ₹50,000 purchase protection insurance.
- VISA Platinum: Available with accounts maintaining a ₹25,000 balance, this card includes a ₹5 lakh child education cover, a ₹30 lakh personal accident insurance, a ₹1 crore air accident insurance, quarterly airport lounge access, and higher transaction limits.
These cards function like standard debit cards but offer parental oversight through digital banking platforms and mobile apps, allowing guardians to monitor all transactions in real time.
No minimum balance requirement
Unlike regular savings accounts, most kids’ bank accounts do not carry minimum balance rules. This allows children to save small amounts without fear that penalties will reduce savings. Most banks do not charge for non-maintenance of AMB on minor accounts, making them accessible for deposits of any amount.
Sweep-out facility for higher returns
When the balance in a kid’s bank account exceeds ₹15,000, some banks offer a sweep-out facility that automatically converts amounts above ₹10,000 into a fixed deposit for 370 days. This happens in multiples of ₹1,000, ensuring surplus funds earn higher fixed deposit rates while maintaining liquidity of ₹10,000 in the savings account.
This automated optimisation maximises returns without requiring any input from the guardian, teaching children about different investment instruments.
Guardian account requirement
To open a kid’s bank account online at a particular bank, the parent or guardian must hold a savings account with the bank. If you do not have an existing account, both accounts can be opened together during the application process.
This requirement facilitates fund transfers between guardian’s and child’s accounts and ensures proper KYC compliance.
Supporting better financial habits from an early age
Opening a bank account for kids is a practical step towards building consistent financial habits. By learning how to save, track money, and understand the impact of the savings,children can develop skills that support better financial decision-making over time.
Image source: elements.envato.com
