What is the Best Way to Give a Financial Gift to a Child?
Apart from spending money to fulfil every wish of your child, securing his/her future through savings can be an excellent gift. Investing some amount each month can grow your money into a big corpus. Parents save money for many crucial purposes like education, and marriage. Education is crucial for children so that they can have the freedom to live the life the way they want. Also, due to increasing fees of higher education – it becomes critical to start investing soon.
Each priority is set according to a period. Thus, parents need different approaches to deal with every priority. When it comes to gifting your children something important – investing for them is definitely a very good option. Investing in Fixed Deposits is probably the most risk-free investment option available for parents. Additionally, many FD schemes also include insurance cover for children.
Different Ways to Give a Financial Gift to Children
Assets and Cash for Investment
The current laws make receiving any amount which exceeds Rs. 50000 taxable under “income from other sources”. However, when this amount is given by relatives it is considered as gifts. Hence, under such circumstances, it is exempted from any taxes. Moreover, if this amount is given in a form of a gift for marriage, or will – its tax exempted.
Transferring any amount through cash or cheque is considered as a gift. This may include property, jewellery, and shares. Also, registering a gift deed is not compulsory when you make such a transfer, however, it is advisable. Although these are not taxable – the recipient is entitled to pay tax on the income generated by it as it gets clubbed with his/her income.
The interest earned on the amount gifted to a daughter who is above 18 years for investing purposes is also taxable up to a certain limit. The earnings on that amount is taxable from the daughter’s annual income after it reaches above the exempted 1.9 Lakh. On the other hand, if it is being gifted to a major son – the interest earned will get taxed after 1.8 Lakhs of his income. Also, there are tax benefits if there are two daughters who are of 18 years or above and grandparents of and above 80 years. In this case, parents can invest 1.88 Crore which exempts the income up to 18.8 Lakh.
In case of minor children, parents can invest in a trust for their benefits. The trust is created by transferring some amount which parents cannot claim back. Any investments for the minors are to be done by that trust. The generation of income through those investments don’t get clubbed with parents’ income and the trust is liable to pay taxes.
Investing in Fixed Deposits under the child’s name is also an excellent way of gifting money. The earned interest on the deposited amount is taxable by clubbing it with the parents’ income. Also, if the child is minor, Rs. 1500 is exempted from tax under Section 10(32).
Child Insurance Plan
Child insurance plans insure families including a minor. If one of the parents faces an untimely death, the other parent gets insured and will be able to provide for the child’s future. The premium paid for the insurance is exempted from tax under Section 80C.
Public Provident Fund
Public Provident Fund or PPF is a long-term investment plan that comes with a minimum maturity tenor of 15 years, which you can extend for another 5 years if needed. Unlike EPF or Employees Provident Fund, any individual earning a regular income can open a PPF account in a local bank or post office branch. To start a Provident Fund(PF), you can deposit a sum as low as Rs.500. The only condition for PPF is that you must invest a minimum of Rs.500 or a maximum of Rs.1.5 lakh in your account once every year. Your PPF investment is capable of fetching you a high-interest return of up to 8% at present. Moreover, you can claim 100% tax exemptions of up to Rs.1.5 lakh every financial year under Section 80 C of the Income Tax Act basis your investment and interest earnings for PPF. What’s more, you can utilise the risk-free, high maturity amount of your PPF to cover the overseas educational expenses for your child.
To manage your child’s higher education costs, you can invest in gold ETFs, which are comparable to one gram of gold. In order to undertake an investment in gold ETFs, you just have to open a DEMAT account and then invest exactly in the same manner as you would have done for mutual funds. Here instead of buying units in stocks, you or your fund manager will buy gold units in paper form. ETFs, offer better liquidity as compared to gold in physical form. This is because you can sell your units anytime you want or when the market looks favourable and offers a higher price for your units. Unlike gold’s purity and time-bound value decrease, gold ETFs will yield the exact market value prevailing at the time of your sell.
Sukanya Samriddhi Yojana (SSY)
To support the wellbeing and freedom of the girl child under the ‘Beti Bachao, Beti Padao’ campaign, the Indian government in 2015 launched the Sukanya Samriddhi Yojana (SSY). You can open an account under SSY for two of your daughters before they attain the age of 10 years. SSY accounts come with a long maturity tenor of up to 21 years, where you will have to pay at least Rs.250 or a maximum of Rs.1.5 lakh every year for 15 years. Starting from the 15th year and until maturity, you do not have to invest anything at all. Your existing investment fetches interest during this time. As per the SSY guidelines, interest rates are altered every quarter, which for the present quarter ending December 2018 has been fixed at 8.10%. Your investment and interest earnings for SSY enjoy an EEE status. This means you can claim both your investment and interest returns every year up to a 100% as tax exemption under Section 80C of the Income Tax Act. Moreover, you can partially withdrawal up to 50% of your investment after 5 years of account opening or when your daughter turns 18.
Aman Khanna is working in the domain of Investment management in one of the top universities. He has published research papers and case studies in Investment and Fixed Deposit(FD) marketplace. He is an avid blogger in the domain of Investment management. you can also find him on social networking platforms.