Gemara

Anshei Keneses ha'Gedolah (the Great Assembly) asked Hash-m to hand over the Yetzer Ra for Arayos. Hash-m did so. They could not find a fresh egg. They reasoned that Hash-m would not consent to remove only the Yetzer for what is permitted. They blinded it. This helped that people not lust for their relatives.

Kidushin 81b: R. Acha bar Aba visited Rav Chisda (his son-in-law). Rav Acha put Rav Chisda's daughter b'Kanfei (in his lap; alternatively, under the sheet, to sleep with her b'Kiruv Basar (without clothes)).

Rav Chisda: She is Mekudeshes!

Rav Acha: Rav taught that one should not be Mekadesh his minor daughter!

Rav Chisda: You transgressed Shmuel, who says that we do not use a woman!

Rav Acha: I hold like another teaching of Shmuel, who permits what is done l'Shem Shamayim (e.g. to show my daughter that I cherish her daughter).

Shabbos 13a - Question: May one sleep (in the same bed) with Ishto (his wife when she is a) Nidah, when each is in his or her own garment?

Answer (Rav Yosef - Mishnah - Beis Hillel): One may not put fowl and cheese on the same table, nor eat them together. (Likewise, we decree about a Nidah.)

Support (Beraisa): "...v'Es Eshes Re'ehu Lo Timei v'El Ishah Nidah Lo Yikrav" equates a Nidah to another man's wife. Just like one may not sleep with another man's wife, even if both are clothed, the same applies to Ishto Nidah.

Rav Yosef argues with R. Pedas:

(R. Pedas): (It says "Lo Sikrevu Legalos Ervah.") The Torah forbids only Kirvah (closeness) of Bi'ah with Ervah.

When Ula would come home from learning, he would kiss his sisters on the (garment over their) chests; some say, on the sleeve.

Ula contradicts himself!

(Ula): Even approaching Arayos is forbidden - 'Lech Lech Amri Nezira...' (one must distance himself from sin).

Rishonim

Rif and Rosh (Shabbos 5b and 1:32): "...V'Es Eshes Re'ehu Lo Timei v'El Ishah Nidah Lo Yikrav" - just like one may not sleep with another man's wife, even if both are clothed, the same applies to Ishto Nidah.

Ran (Kidushin 33a DH Misyached): One may be secluded with his sister on occasion. One may dwell with his mother or daughter. The Yetzer Ra for them does not incite for them, due to the Tefilah of Anshei Keneses ha'Gedolah. We follow the Stam Mishnah against the Beraisa.

Ran (DH Omar): Even though the episode with Rav Acha did not involve sleeping b'Kiruv Basar, it was brought in the discussion of our Mishnah. Also, the Mishnah discusses a daughter, and the episode involved a granddaughter! Also, if she is Mekudeshes one must refrain, even if she has no Simanim! It seems that the Rif (in Kidushin) had a different text.

Rambam (Hilchos Isurei Bi'ah 21:6): If one hugs or kisses an Ervah for which a man feels no lust, e.g. his adult sister, maternal aunt or similar Arayos, even though he gets no pleasure, this is exceedingly despised, Asur and foolish. We may not approach an Ervah at all, adult or minor, except for a mother with her son or a father with his daughter.

Magid Mishneh: He learns from the Gemara's challenge against Ula.

Tosfos Shabbos 13a DH u'Fliga): Ula was a total Tzadik, and was sure that kissing his sister would not cause him to have lust.

Rashba (1188): "Lo Sikrevu" applies to all Arayos. Perhaps closeness without intent for Bi'ah is only mid'Rabanan. The Torah forbids only things like sleeping together or kissing, even on the sleeve. A man is uninhibited with his wife, so Chachamim forbade things with Ishto Nidah, such as passing a Kli to her, which would not lead to Bi'ah with other Arayos, for which one is not incited.

Rashba (Teshuvah 127, attributed to Ramban): Presumably, a doctor may not take the pulse of Ishto Nidah who is sick. Perhaps all Kirvah is forbidden, like it says in Shabbos. "Lo Sikrevu" applies to all Arayos. Even R. Pedas admits that all Kirvah is Asur mid'Rabanan. We do not permit for a Choleh without danger.

Tosfos Rid (81b DH Omar): Rashi says that Rav Chisda said that one must distance from a married woman. Why should one need to distance from her more than from a single granddaughter?! Rather, because she is Mekudeshes she is like an adult, and you should not put her in your lap, like one does with a minor.

Poskim

Shulchan Aruch (EH 21:7): If one hugs or kisses an Ervah for which a man feels no lust, e.g. his adult sister, maternal aunt or similar Arayos, even though he gets no pleasure, this is exceedingly despised, Asur and foolish.

Chelkas Mechokek (9): One may kiss his three year-old sister, for it is not l'Shem Kirvah and it is all l'Shem Shamayim.

Rebuttal (Gra 25): The Gemara said that Ula acted unlike his teaching!

Shulchan Aruch (ibid.): We may not approach an Ervah at all, adult or minor, except for a son or daughter.

Source (Gra 27): The episode with Rav Acha involved a minor.

Chelkas Mechokek (10): Also one's granddaughter is permitted, l'Shem Shamayim, like the episode in Kidushin. The same applies to a small sister.

Question (Beis Shmuel 14): The Ran said that the Heter is for a daughter, not a granddaughter! Other Poskim do not explicitly permit. What is the source to be lenient? Perhaps we may infer that the Rambam and others disagree with the Ran. They learn from Rav Chisda that one may not sleep with her (one's daughter) if she was Mekudeshes. This shows the Rambam and others equate a daughter and granddaughter. However, if so why did Rav Chisda say that Rav Acha (even if he thought that she was single) transgressed using a woman? Is there any source to say that putting her in his lap is worse than sleeping b'Kiruv Basar?! If it is worse, what is the source to learn from here to forbid b'Kiruv Basar (if she is Mekudeshes)?

Answer (Beis Shmuel): Perhaps Rav Chisda doesn't equate a granddaughter to a daughter, but Rav Acha does. We derive that an Arusah is forbidden because Rav Acha did not answer immediately that everything l'Shem Shamayim is permitted. Therefore, b'Kiruv Basar is permitted if she is single, for a daughter, granddaughter or sister. If she matured, even a daughter is forbidden b'Kiruv Basar, or in his lap, or to lie with his head in her lap. They may lie together if they are clothed, even if she is an adult, and, it seems, even if she is married. We do not distinguish an adult, Arusah or a Nesu'ah. Any other Ervah, or even a Penuyah may not peruse his head. The Taz permits a sister. However, one may not sleep with a sister, even clothed, or be secluded together. All the more so hugging and kissing are forbidden. It is permitted only for someone like Ula, or for one's small sister.