Summary of this article
Investing in a child's name is often a significant emotional milestone for parents. However, the practical question remains: can this also provide tax benefits? To leverage this strategy effectively, you must understand the specific rules governing these investments.
For most parents, investing in their child’s name is an emotional milestone. It feels like you’re building a secure financial future for them. But beyond the sentiment, many also wonder if it can help save taxes. The truth is: yes and no. There are some rules you need to know:
The ‘Clubbing’ Rule Parents Must Know
When you invest in the name of a minor child (below 18), as per the Income-Tax Act (I-T Act), the income from that investment doesn’t really belong to the child yet, it gets added to the parent’s income (the one with the higher taxable income). So, whether it’s interest from a fixed deposit or dividends from shares, you’ll be paying tax on it at your own slab rate.
“The only small relief is where the parents can claim an exemption of Rs 1,500 per child per annum under Section 10(32) of the I-T Act. So, if you’re thinking of parking money in your child’s name purely to lower your tax liability, it won’t work as long as they are below 18 years in age,” says Preeti Sharma, Partner, Global Employer Services, Tax and Regulatory Services, BDO India.
Where Parents Can Still Benefit
The smarter way to look at this is not just tax-saving today, but wealth-building for tomorrow. Some government-backed and long-term investment options give you both-tax efficiency and security:
Sukanya Samriddhi Yojana (SSY): You can open an SSY account if your daughter is up to the age of 10 and contribute up to Rs 1.5 lakh on annual basis. You will get a deduction under Section 80C of the I-T Act in the Old Tax Regime. The interest is tax-free, and the maturity proceeds are also tax-free.
Public Provident Fund (PPF): You can open a PPF account in your child’s name too, though the annual contribution cap of Rs 1.5 lakh is shared between your account and theirs. The big plus? Tax-free returns and a safe, long-term compounding effect.
Child Insurance Plans: Certain policies give Section 80C deductions on premiums, while the maturity payout is tax-free under Section 10(10D).
Medical Insurance Cover For Family: The premium up to Rs 25,000 is eligible for deduction under Section 80D of the I-T Act in the Old Tax Regime.
Equity Mutual Funds Or ETFs: Great for long-term goals like higher education. While the income is clubbed until the child turns 18, you’re building a corpus that can later grow tax-efficiently in their own hands.
The Real Turning Point: Age 18
Here’s where things get interesting. “Once your child turns 18, they are treated as a separate taxpayer. The clubbing rule no longer applies. That means the investments you’ve been building in their name can now start generating income that is taxed in their hands, not yours,” informs Sharma.
Takeaway For Parents
Think of investing in your child’s name less as a short-term tax trick and more as a long-term financial strategy. During their minor years, the tax break is small.
“The real advantage, however, comes once they’re adults, with a separate income tax return filing requirement. Add to this is the benefit of compounding over a decade or more, and you’re setting them up for both financial independence and tax efficiency,” says Sharma.
