We all know it is important to plan for our children’s future, early on. However, many parents are not aware of the benefits of such investments. So, let us discuss some investment options and their rationale.
Public Provident Fund (PPF) Account
A taxpayer can invest in a PPF account as a guardian in the name of his child. Only one parent can open an account in the name of one child, that is, there can be only one account for one child. The maximum he can invest in the account is Rs 1.5 lakh during any given financial year and the taxpayer is eligible to claim such investment as a deduction under Section 80C from his total income up to a maximum of Rs 1.5 lakh. If the parent has more than one PPF account, that is, in his own name and in the name of his child, the maximum contribution in both accounts and the maximum tax deduction under Section 80C is Rs 1.5 lakh. Since a PPF has been accorded the EEE (Exempt-Exempt-Exempt) status, the interest received is tax free.
Bank Fixed Deposits
A parent can invest in an FD in the name of the child. The interest arising on such an FD will be clubbed in the hands of the parent and he must include such interest in his total income. Here, the parent can claim an exemption of Rs 1,500 in respect of the income of each minor child under section 10(32). If the investment has been made in a tax saving FD, the taxpayer parent will be eligible to claim a deduction for the same under Section 80C up to a maximum limit of Rs 1.5 lakh.
Savings bank accounts
A savings account in the name of a child, with parents regularly depositing in the account can also trigger clubbing provisions. The interest arising from the account would get clubbed in the hands of the parent who must offer it to tax. In this case too, if the child is a minor, the parent would enjoy an exemption of Rs 1,500 per minor child. The parent has to report details of such bank account in his/her return of income.
In all of the above mentioned cases, it is important to note that if the investment is made by the minor child out of income which has arisen or accrued to the minor child on account of activity involving application of skill, talent or specialised knowledge and experience, the income arising out of such investment cannot be clubbed in the hands of the parent. It must be reported in the child’s own income tax return.
Child insurance plans
A child plan is developed on the concept of providing financial support to the family for the child’s future, if parents meet with an unfortunate death. Insurance plans designed for the child do not usually insure the child. The life insured under these plans are the parent who has a minor child to provide for. The underwriting is done on the life of the parent and details of the child are to be provided in the policy. Parents can get tax benefit on the premium paid under Section 80 C and on the claim received Section 10(10D) of the Income Tax Act.
Sukanya Samriddhi Yojana Account
Parents of a resident girl child who has not attained 10 years of age can open an SSY account with any post office or authorised branch of commercial banks. A minimum contribution of Rs 1,000 and a maximum of Rs 1.5 lakh can be made for a period of 15 years from the time of opening the account. The SSY too is eligible for deduction under Section 80C up to Rs 1.5 lakh and both the interest and maturity proceeds are completely tax exempt.
The writer is founder and CEO - ClearTax
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