Smart Savings and Tax Planning Tips for Parents of Minors

Complex regulations surrounding taxation and savings for minors can be overwhelming, but with the help these rudimentary tips, parents can confidently take a few steps to secure their child's future.

Introduction

One of the best ways to secure your child's future financially is to start saving and investing as early as possible. As a parent, you need to make sure that your child's money, which you hold in trust for her as a natural guardian, is put to good use, and that the right savings and investment vehicles are chosen, especially from the Income Tax perspective.

One of the first steps towards achieving this goal is opening a bank account in your child's name. This not only teaches your child the importance of saving from a young age, but also enables you to start depositing money into their account. As they grow up, they can learn about money management and budgeting, which will help them to become financially responsible adults.

One great option is to open a Public Provident Fund (PPF) account for your child. The PPF is a long-term savings scheme, which is backed by the Government of India and offers tax benefits. The interest earned on PPF deposits is totally tax-free, irrespective of the amount of the interest accrued in the financial year, which makes it an attractive investment option for parents who want to save for their child's future. The account can be opened in the child's name, with the parent or legal guardian acting as the guardian. The PPF account matures after 15 years, but can be extended for an additional 5 years. This gives you plenty of time to save for your child's future, and also allows you to earn tax-free interest on the accumulated balance.

However, it is important to note that any income earned by a minor is subject to clubbing of income provisions. This means that any income earned by the minor child will be added to the income of the parent with the higher income, and taxed at the parent's tax rate. This can be avoided by investing in tax-efficient instruments like PPF, where the interest earned is completely tax-free.

Poonam, with our two sons, circa 1995, Amritsar.

However, there are certain exceptions to this rule. If the minor earns income from activities that are related to their own talent or skill, such as modeling or acting, the income is not clubbed with that of the parents. In such cases, the minor is required to file their own tax returns and pay taxes on the income earned by the minor in their own right. Of course, you as parent/ guardian shall be signing the return.

Another important aspect to consider is the limit of tax-free gifts under the Income Tax Act. Gifts received from anyone other than close relatives up to a limit of Rs. 50,000 per year are tax-free for minors. However, gifts received from relatives, such as grandparents, aunts, and uncles, are entirely tax-free, regardless of the amount. It is important to keep these limits in mind while gifting or receiving gifts on behalf of your child, with due regard to the clubbing of income provisions.

In addition, parents need to ensure that their child has a valid AADHAAR Card, which is issued by the Unique Identification Authority of India (UIDAI). The Aadhaar card serves as a proof of identity and address, and is mandatory for availing various government schemes and services. The card can be obtained for children as young as 6 months old, and it is important to get it done early on to avoid any hassles in the future. This also facilitates opening of a minor’s bank account, including the PPF account.

Apart from PPF, there are other tax-efficient savings schemes that parents can explore, such as Sukanya Samriddhi Yojana (SSY), which is a savings scheme designed specifically for the girl child, and offers tax benefits under Section 80C of the Income Tax Act. National Savings Certificate (NSC) and Equity-Linked Savings Scheme (ELSS) are also popular options for parents looking to invest in tax-efficient instruments.

Another important aspect to consider is the tax benefits of investing in education-related expenses for minors. As per Section 80C of the Income Tax Act, expenses incurred towards the education of a minor child are eligible for deduction up to Rs. 1.5 lakh per annum. This deduction can be claimed by either parent, subject to the overall limit of Rs. 1.5 lakh per annum. This includes expenses incurred towards tuition fees, books, uniforms, and other related expenses.

Moreover, parents can also claim a deduction under Section 80D for medical insurance premiums paid for their minor children. This deduction is available up to Rs. 25,000 per annum, and an additional deduction of up to Rs. 25,000 per annum can be claimed if the parents are senior citizens.

Kim Kardashian and Kanye West, with their four children, one natural-born and three though surrogacy.

In conclusion, it is essential for parents to start planning and saving for their child's future from a young age. By opening a bank account, PPF account, and investing in tax-efficient savings schemes, parents can ensure that their child's financial future is secure. It is important to consult with a qualified CA or financial advisor, who can guide you through the various investment options and help you make the right choices. As a parent myself, I opened PPF accounts for both my sons, born in 1990 and 1993 respectively, within a year of their birth, and deposited all their birthday gifts, meagre as they were, in their accounts. This allowed them to accumulate a a reasonable balance over the years, and has provided financial security for their future endeavours, especially education.

By taking a few simple steps today, you can pave the way for your child's financial security and ensure that they are well-equipped to handle their finances when they come of age and start their life as a major with a reasonable corpus under their belt.¹

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