Personal finance: Here are the benefits of investing in your child’s name
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. There can be only one account for one child. The maximum investment allowed is Rs 1.5 lakh during any given financial year . This investment is eligible 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 Accounts
A parents can invest in Fixed Deposits and savings bank accounts in his chid’s name. In both cases the interest earned will be clubbed in the hands of the parent and subject to tax. In case of minor children, parent can claim an exemption of Rs 1,500 in respect of the income under Section 10(32). Parent has to report details of such bank account in his/her return of income. If the investment has been made in a tax saving FD, parent will be eligible to claim a deduction for the same under Section 80C up to a maximum limit of Rs 1.5 lakh.
In all of the above mentioned cases, 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. These do not usually insure the child, but insure 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 80C and on the claim received Section 10(10D) of the IT Act.
Sukanya Samriddhi Yojana Account
Parents of a girl child who has not attained 10 years of age can open an SSY account with any post office or authorised bank branch. 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. SSY, too, is eligible for deduction under Section 80C up to Rs 1.5 lakh and both the interest and maturity proceeds tax exempt.
The writer is founder and CEO of ClearTax
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