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Have you made investments in the name of your minor child? Paresh Parekh & Preeti Kothari demystify the tax implications.
WITH increased awareness and availability of varied investment options, parents are choosing to make investments in the name of child, to ensure quality education and secure the child's future. However, just like in case of any other investments, such investments trigger tax implications. Consider this. Rahul has made the following investments in the name of his minor son, Master Rohan: A residential flat; fixed deposit with Modern Bank of Rs 50,000; life insurance policy, whereby he pays a premium of Rs 36,000 per annum for 20 years and a PPF of Rs 20,000.
Master Rohan has earned the following income from above investments: Annual rent from flat of Rs 120,000; interest on fixed deposit of Rs 4,000 and interest on PPF of Rs 1,600. Rahul wonders whether the above income would be taxable, and how? The taxman does not provide for any blanket exemption in respect of income earned on investments made in the name of minor children. Such income will be taxed in the hands of either Rahul, or, his wife, if her income is higher. However, once it is included in the income of either parent (who has the higher taxable income), it generally continues to be so included in the income of that parent each year.
The parent, with whom the child's income is clubbed, will be eligible for an exemption to the extent of Rs 1,500 per child in respect of income which is so included. Further, if the income is otherwise exempt from tax, such as, interest on PPF, LIC maturity proceeds, such income would continue to be exempt and would not be clubbed and subject to tax in the hands of the said parent of the minor child.
In Rahul's case, his wife's income is higher, and hence, Master Rohan's income from rent and interest on fixed deposit, will be included in the income of Rahul's wife. However, Rahul's wife will be eligible for an exemption of Rs 1,500. As and when the child becomes a major, the income from such investments is taxed in the child's hands and not in the hands of the parent.
Tax break for the investment
Now, Rahul wonders, whether he can get tax break on investments made in name of Master Rohan, given that Rohan's income is included in the income of Rahul's wife? Irrespective, of whether Master Rohan's income is included in his income or not, Rahul should get a tax break on specified investments made in the name of his child. Section 80C of the Income Tax Act provides for deduction from taxable income, even where the investment is made in child's name, in Life Insurance Policy premium, PPF, unit-linked insurance plan offered by Unit Trust of India, etc. This benefit is currently available up to a maximum limit of Rs 1 lakh in aggregate.
Thus, Rahul, should thus get a tax break on his following investments made in name of Master Rohan: Life insurance policy premium of Rs 36,000 and PPF of Rs 20,000. To sum up, parents are advised to consider the tax implications, including tax breaks available, in respect of making investments in the name of the minor child.
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