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One of the primary financial goals most people have is saving enough to finance their children’s higher education and marriage. While you can choose any instrument keeping in mind the tenure of the goal and return expectation, some people prefer to invest in their children’s names. Though that does not provide any significant advantage, it can help you take a disciplined approach towards saving for children. Here are a few such investments that you can make in your children’s name.
Sukanya Samriddhi Account (SSA)
This investment can be made only in the name of a minor girl child. It is a social welfare scheme which aims to fund a girl child’s needs such as her education and marriage.
As parents or legal guardians, you can open only one account in the name of one girl child and a maximum of two accounts for two different girl children. At present, the scheme offers a tax-free interest of 8.5% per annum. A minimum of ₹250 and maximum of ₹1.5 lakh can be invested in a financial year in name of one girl child. So if you have two daughters, you can invest up to ₹3 lakh in total across two accounts, one in the name of each daughter.
SSA is meant for long-term goals like children’s education and marriage. Contribution to the scheme qualifies for tax deduction under Section 80C of the Income-tax Act, 1961. Compared to its peers, this scheme provides better returns, which are tax-free.
However, interest rates on small savings schemes, including SSA, is pegged to government bonds and are recalibrated every quarter.
Public Provident Fund (PPF)
PPF is another instrument you can consider to invest in your minor children’s name. However, if you have a PPF in your name as well, remember that your overall investing limit for all your PPF accounts, including your children’s, remains ₹1.5 lakh. Currently, PPF offers a tax-free return of 8% per annum, and a tax deduction at the time of investment under Section 80C of the Act.
Just like SSA, PPF is also meant for long-term goals, as it matures after 15 years. However, partial withdrawal is allowed from the seventh financial year.
Mutual Funds
You can choose debt or equity-oriented schemes in the name of your minor child, for short-term and long-term goals, respectively. Ideally, one should consider taking the help of a financial planner or advisor to build an appropriate portfolio consisting of both debt and equity schemes.
There are no additional benefits to derive by investing in the name of a child, until the withdrawal is made after the child becomes a major. In that case, gains from such investment will be considered as the child’s income and while filing her returns she can claim exemption of up to ₹1 lakh separately from long-term capital gains from equity funds.
Things to remember
According to Section 64 (1A) of the Act, income from investment in a child’s name gets clubbed with the parents’ income and gets taxed accordingly.
However, there is a small advantage; if your income includes income from your minor child, you can claim an exemption under Section 10 (32) of up to ₹1,500 or income of minor so clubbed, whichever is less.
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