Wednesday, May 23, 2012

Tips to save income tax on investment in child's name

There are quite a few ways in which one can save income tax by investing in children's name.

Child can have a Public Provident Fund (PPF) account even if he or she is less than 18 years old. So, to reduce taxable income, one can invest up to Rs 70,000 in child's name. Since the interest earned in PPF account is non taxable, there is no tax on Rs 70,000 and one gets a good sum of money after 15 years when the account can be closed. However, this is the maximum limit that one can contribute to the PPF, whether it's in one's name or the child's. However, if one has already invested in other Section 80C tax instruments, would recommend investing Rs 70,000 in PPF account of your child as this could be thought of a good way to build education fund for the child.

Please remember that as a general rule, if one invests in child's name, any income that is earned from this investment will be clubbed with one's income and one will have to pay tax on it. PPF does not come under this rule as the interest for amount up-to Rs 70,000 per year is non taxable. So, avoid investing in a short-term fixed deposit as it is not tax-efficient. Other than PPF, one can put the money in assets where the income is received by the child after he or she becomes an adult. These include 10-year cash certificates and zero-coupon bonds (depending on the age of the child).

However, if one has already made short-term investments, one can still benefit as the child's short-term capital gain or loss can be offset against your short-term capital gain or loss. Also, if child's income is clubbed with ones', one can avail of an annual exemption of Rs 1,500. This provision is available for up to two children. So, you could consider investing Rs 15,000 for each children in a long-term FD that earns 10% interest every year. However, keep in mind, that the interest will be calculated on a compounding basis, which means that the money in the FD will increase over the years and one may have to pay tax on it.

If child earns money, it will be considered his or her income and he or she will have to pay tax on it. This money will not be clubbed with your income. He or She could earn it by working manually or by using his or her skill, experience, talent or specialised knowledge, such as selling a painting or working in an advertisement. However, this does not apply to general public.

One can avail of a tax benefit if one buys a life or medical insurance cover for the child. While buying life insurance for a child may not make much sense, you could take a health plan to cover against illnesses. The premium that you pay for the plan is eligible for deduction under Section 80C, along with your other investments. However, most companies these days offer medical insurance for the family.

A monetary gift received from specified relatives, such as parents and grandparents, is exempt from tax. A sum of over Rs 50,000 from other relatives will be taxable. However, if the child receives money through inheritance or as an award from an educational institution or a foundation, he will not have to pay tax on it.

Note:
Before one can begin investing, one should obtain a PAN card for the child, even if he or she is a toddler. Once the PAN is allotted, it will act as an identity proof and also make him eligible to access various financial instruments, such as a bank account or demat account.