Combining investment with the tax-savings benefits can help parents to achieve their goals. However, one must be mindful about the clubbing provision in the Indian Income Tax Act. Let us evaluate the options available for investment without clubbing the income generated out of the said investment in the hands of the parent. As per the existing clubbing provision, any income accruing or arising to a minor child, other than a minor child suffering from any disability of the nature specified in Section 80U shall be included in the total income of that parent, whose total income before such clubbing is greater. In case the marriage of the parents does not subsist, then the income of the minor child shall be clubbed with the income of that parent who maintains the minor child in the previous year.

In cases where the income of the child is clubbed with that of the parent, the parent can claim an exemption of the income clubbed or . 1,500 whichever is lower, in respect of each of the minor children. However, the clubbing provisions as discussed above shall not apply, in case the income that arises or accrues to the minor child on account of any manual work done by him or on account of any activity involving application of his skill, talent or specialised knowledge and experience like child artist, sports personality etc. Fortunately, there are certain options which allow you to invest in the name of your child and still avoid clubbing provisions. There are various investment options available, wherein you could invest in the name of your child and claim the tax benefit as well under the I-T Act. Such investments not only give you the tax benefits in the year of investment but also ensure a tax-free return in future, to your child. From such investments, the returns inflow would generally come in the year of need, when there is the need for money for higher education, starting up a new venture, marriage etc.

Some of these investment options include: Investments in Public Provident Fund (PPF), modified endowment plan for a fixed period, children education plan policies, bond/post office schemes, systematic investment plan (SIP) in various mutual funds/gold funds etc. Investment in the above mentioned options will mean that an individual could avoid clubbing of income in his hands, arising on maturity/redemption of such investments, made in the name of his child, as they would be exempt at the time of withdrawal or even if it is taxable, then it will be taxable at a lower rate than the rate for parents, depending upon the income. To explain this with an example, let us take the case of an individual investing . 10,000 in the name of his child in year 1 in PPF account and assuming that he continues to contribute every year . 10,000 on April 1.

The receipt of the same at the end of the withdrawal period is exempt, if received by the parent. In case the withdrawal happens after 18 years, when the child becomes a major, he will receive approximately the total amount of . 4,04,000 on an investment of . 1,80,000 and the same would be exempt in his hands. Similarly, if the parent is buying a modified endowment plan policy for a fixed term say 15 or 20 years, then the amount received on the completion of the term in the hands of a child is not liable for tax. In both the above examples , the parent (i.e. who is investing in the name of the child) continues to enjoy the benefit of tax relief on the investment from his/her taxable income & the accrual of interest income does not get clubbed or taxed in the hands of the parents. If the parent is in the highest tax bracket of 30.9% (including education cess), then there is an additional tax savings of . 3,090 (10000 *30.9%) under Section 80C through investment in PPF/ premium paid on a modified endowment plan etc. Further, in instances like children education policy, the parent could get the benefit of the deduction of the premium paid from his taxable income. So, save taxes by investing wisely and guarantee your child's future.

Source :ET