Smart Tips and Ways You Can Save Tax by Investing in Your Child’s Name

By CA Amit Gupta, MD, SAG Infotech

Investing now to save for your child’s higher education and other future expenses is always a good idea. But, did you know you can also save tax by investing in your child’s name? There are a number of ways, including a couple of government schemes, through which you can save tax while saving for your child’s future.

Why should you save in your child’s name?

Investment in certain tax-saving schemes, mutual funds and other plans in the name of your child will help you save tax, as contributions to schemes such as Public Provident Fund (PPF), Sukanya Samridhi account, etc. are eligible for tax deduction up to a certain limit. Not only do you save tax by saving for your child but also it allows you to secure your child’s future by building a large corpus through small but consistent investments in their name.

So, what are some ways to save tax while saving/investing for your child? Here you go.

PPF & SSY
PPF (Public Provident Fund) and SSY (Sukanya Samridhi Yojana) are two of the most popular tax-saving investment vehicles that are offered by the government. These are debt schemes that pay fixed returns every year on the accumulated amount. The point to note is that both the schemes fall under the Exempt-Exempt-Exempt (EEE) category, which means all contributions, redemptions and maturity amounts in these plans are fully exempt from tax. In other words, your contributions to these schemes are exempt from income tax.

There are some basic differences between PPF and Sukanya Samridhi. For one Sukanya Samridhi is only meant for a girl child, i.e. you can invest in this scheme only in the name of your girl child. The account needs to be opened before your girl child attains the age of 10. The SSY account will mature once the girl child achieves the age of 21, but you need to make deposits only for 14 years and can make premature withdrawals of up to 50% of the corpus at the age of 18 for the purpose of marriage or higher education. For the Q2 FY 2022-23, the SSY account pays an annual interest of 7.6%.

PPF is a pension-focused investment plan by the central government. At present, it pays an annual interest of 7.1% per year. Any Indian citizen, including children, can have a PPF account. However, the PPF account of a child below 18 years will be managed by the parent. If the father already has a separate PPF account, the total contribution to both PPF accounts (of the father and the child) cannot exceed Rs 1.5 lakh a year. After the child attains the age of 18, the guardian will be removed from ownership. The maturity period of PPF is 15 years but it can be renewed every five years after maturity to keep earning interest.

Both PPF and SSY account contributions are eligible for tax exemption under Section 80C. The maximum eligible amount for tax exemption under 80C is 1.5 lakh per year in all schemes, including SSY and PPF. That said, you can invest a maximum of up to 1.5 per year in PPF or SSY or both schemes combined.

Deduction on Tuition Fees

Other than the above-mentioned government schemes, a parent can also claim tax exemption on tuition fees paid in the name of their children. This deduction also comes under Section 80C and the maximum eligible limit for deduction is Rs 1.5 lakh per year.

In addition, a salaried tax-paying person can also claim a deduction of Rs 100 per month per child in the name of education allowance and Rs 300 per month for hostel allowance (max two children if only one parent is a taxpayer, or max three children if both parents are taxpayers.) For deduction of tuition fees under Section 80C, the child must be studying in a recognized India-based educational institute.