Tax Planning Tips – How Your Kids may help you save Income Tax?

goodmoneying.com

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.

Please do understand the pros, and cons of opening a Private Trust before getting into it.

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. 

Let's get good with Money

Join thousands of readers who receive our newsletters and get

  • FREE E-book- "Be good with Money"
  • FREE Financial Records Organiser
  • FREE E-course on Personal Financial Planning

We hate spam. Your email address will not be sold or shared with anyone else.

10 COMMENTS

  1. I have few question regarding Tax implication . First if I surrender my Life Insurance Policy after 3 years of regular premium, does that surrendered value payable to me will be taxable. If so, at what clause and how to avoid it by reinvestment in same FY. Second one regarding Mutual Fund. In case of ELSS , if I redeem after 3 Yr Lock in period , what about the tax implication of return , and in case of other MF . like open ended equity based MF , if I redeem after 1 yr lock-in , what will be the tax implication .

    • No, the surrender value will not be taxable if the sum assured of your policy is 5 times your annual premium. I am assuming that you are reffering to the policy purchased last year or earlier to that. This is because the condition of minimum sum assured for making the policy maturity and surrender proceeds tax free u/s 10(10)d is now (from FY 2012-13) 10 times the annual premium. But do keep in mind that if you have taken section 80C benefit through the same policy then that benefit will be reversed if you did not continue the policy for at least 5 years.
      In case of mutual fund the returns will be in the form of long term capital gain (where holding period is more than 1 years) which is tax free in case of equity oriented mutual fund.

  2. One of my relatives aged 77 is a pensioner, with no rental income. His other income is FD Interest. Recently Tax has been deducted from his Pension.
    On a perusal of 80 C and various other Tax saving deductions, it is noted that none suits a Senior person, until he turns 80 Plus. He requires the entire Pension and FD interest more for meeting his simple living expenses and health related expenses, including expenses on transport to Hospital(Auto expenses per month amounts around 2500pm).

    Under the circumstances, how he can save on the 13% Tax,which all others can save to meet their other requirements.

    • Harinathan…you are looking for some kind of tax saving option for senior citizen where he can save on taxes and generates regular income too. Here you can go with 2 options – one is 5 year bank fixed deposit ( with monthly interest payout) or Senior citizen savings scheme . For section 80C savings both these options come with 5 years lock in. But you can claim the interest payments (monthly/quarterly) for bank Fixed deposits and quarterly for Senior citizen schemes. Thus in your case you just have to convert the available FDs into specific tax saving products.

  3. A NRE gifting his wife Rs. 40 Lakhs and the wife is investing the same money in a Bank Fixed Deposit.. What will be the tax implication both both Husband and Spouse under IT act in India… Whether the NRE will be taxable on the returns that is generated from the fixed deposit which his wife had invested? Thanks…

LEAVE A REPLY

Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.