This article is third and second last in the series of articles on the topic “Tax Planning for different life stages.”
In the earlier 2 articles, I have covered –Tax Planning Tips for a young person and Tax Planning Tips for a young married couple. It’s better to read all the articles in continuity to get a better understanding of the whole concept.This time I will be covering Tax Planning Tips from the point of view of Married couple with Kids – Minor and Major.
Tax planning tips for Couple with Minor Kids:
Tax planning is very crucial at this stage as a minor child does not bring a separate tax file in a family but any income received by the minor children is added or clubbed with the income of father or mother of such child who comes in the higher tax bracket. (Read Clubbing Provisions in Income tax)
There are two small exceptions to it, first is that the income up to Rs 1500 p.a per minor child is exempt and is not included in the Income of the Parent. Secondly, if a child earns income by way of some manual work done by him or through an activity involving applicable of his/her skill, talent or specialised knowledge and experience…then also that income will not be clubbed with parents.
In all other cases, whatever income a child earns will be clubbed in with that of parents. So keeping all this in mind one should be very cautious while investing in the name of the minor. Following TIPs can be of some help to the family in tax planning.
Invest in Tax free instruments: Whatever investment you make in the name of the child should generate tax free returns for e.g Equity (up to Rs 1 lakh p.a.), PPF , Tax Free Bonds etc. so that it should not put more burden on your tax profile.
Invest through Specific beneficiary Trust : If at all you are not comfortable in putting large sum in tax free instruments or in other way you gets restricted due to the limit of investment in some instruments like as in PPF (Read : All about PPF) , then you may start with a 100% specific beneficiary Trust in the name of your child and invest through this Trust only.
While Drafting Trust deed you have to very clearly mention that so long as the minor child is minor, then during such period of minority no part of the income of such trust would be spent on the minor child.
This small little care if is taken into account while drafting Trust deed then there would be no clubbing of the income of minor’s trust with the income of parents of the minor.
Thus, in that case, you may go with taxable instruments like bank Fixed deposits, National saving certificates etc. through this trust only to avoid the Income clubbing. Also whatever gifts child is going to receive through grandparents or other relations then better to receive it through this Trust only.
Hindu undivided family: After Having a child your HUF gets its separate taxability recognition. Though you are eligible to start your HUF account after marriage but as there are different views of tax experts on the taxation aspect so to stay in safe territory better to consider, that from a taxation point of view it gets its recognition only after having a child (male/female). (Read: How to save taxes through HUF?)
This way now you can create a separate tax file which has exemption limits like an individual. You can receive gifts, inheritance in HUF, take loans from HUF, invest the corpus anywhere you like and whatever income gets generated will be taxable to HUF.
Tax planning tips for Couple with Major Kids
The Main point to be remembered here is that the provisions regarding clubbing would apply only till the child is Minor.
If the Child attains majority at any time during the financial year, then he should be considered a major. The Moment your child reaches 18 years of age the first things that you should do is apply for his Pan card.
Gift him/her the complete corpus that you have saved for his education and marriage, so that the further taxability can be shifted to his/her name. To avoid the chances of mismanagement of money get a joint account opened with him and operates it jointly or put some limit on it.
2. Get his PPF account opened if he does not have any as yet and start making the maximum use of it. The restriction which was there with Minor child where the total combined deposit of parent and child should not exceed Rs 1.5 lakh (maximum limit) forgoes here. So one can deposit the maximum amount allowed in his major child account.
3. Whenever you plan to get your Son/daughter married, do keep in mind the points mentioned in “Tax planning Tips for Young married couple”.
While doing tax planning one should never ignore the financial planning aspects. In fact, you should first start with Financial Planning which will give you the holistic view and then move ahead with the different aspects including tax planning. You may go through the article “Plan your kid’s future” to have an idea on how to go about with Kids future planning.
Kids are a good source of tax planning, so every couple in the high-income bracket should make the full use of them. But do keep in mind the above-mentioned TIPs to make your tax planning more effective.
If you have some more Tax planning TIPs or suggestions to save tax for a couple with Children, then do share.