Can Your Child Provide you Relief from Tax Saving?

2024-03-07

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The birth of a newborn is a momentous occasion in a couple’s life. With all the joy and celebrations also comes a host of responsibilities. As you become a parent to a child, his or her well-being is the foremost thing on your mind. So when it comes to giving your child a good education, you want to provide the best.

Key Takeaways

Child insurance plans offer tax benefits under Sections 80C and 10(10D).
Tax-free investments like PPF, SSY, ELSS, and ULIPs secure your child’s future.
Education loan interest is tax-deductible under Section 80E for 8 years.
Avoid tax mistakes like missing deductions or early policy cancellations.
Early tax planning helps beat inflation and grow savings for education.

Tax Benefits of Investing in Child Insurance Plans

Child insurance plans offer several tax benefits that help save on your tax liability. Here’s a detailed look at the tax advantages.

Tax Deductions on Premiums Paid (Section 80C)

Under Section 80C of the Income Act, the premium paid towards the child insurance plans is eligible for a deduction of up to ₹1.5 lakh of the total taxable income. This provision reduces the tax liability and also encourages you to secure your child’s future.

Tax-Free Maturity Benefits (Section 10(10D))

Under Section 10 (10D) of the Income Tax Act, the maturity benefits received from the child insurance plan are exempt from income tax. This exemption ensures that the financial corpus that you are building for your child provides better returns in the future.

Tax-Free Partial Withdrawals for a Child’s Education

Child insurance plans offer the flexibility of partial withdrawals, which can be beneficial during urgent financial needs. The amount you withdraw, including any accumulated bonuses, remains tax-free. This is one of the great features that adds a layer of liquidity while managing tax advantages.

Tax Savings on Higher Education Loans (Section 80E)

If you are taking a higher education loan for your child against the child insurance policy , then you can claim the deduction on the interest paid.

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What are the Best Tax-Free Investments for Your Child?

It is important to start saving early in order to build a corpus for your child’s education. You also need to consider rising inflation into account when choosing an investment option to ensure that your savings do not fall short of the amount required 20 years from now.

Did You Know?

Under Section 80E, you can get tax deductions on education loan interest repayment for your child’s studies for up to 8 years.

Source: ET

Here are a few tax-free investments for your child that not only help you save tax but also help you generate higher returns that can help you accumulate the estimated amount for your child’s future education:

Public Provident Fund(PPF): This is one of the oldest and most risk free tax saving investments. You can start by investing a minimum of ₹500 to a maximum of ₹1.5 lakh in the name of your minor child. It is a long term investment with a 15 year lock-in period. The principal invested annually qualifies for exemption as per provisions under 80C, however, it cannot exceed ₹1.5 lakh, including contributions made to accounts in your name and that of the child. Interest is compounded annually every year, is tax free and is added back to the principal until the account is active. When your child turns 18, he or she can operate the account in their name, or you can withdraw the entire amount for your child’s higher education.
Sukanya Samridhi yojana(SSY): If you have been blessed with a girl, you can open a SSY account. It is one of the child investment plans to empower girls and also comes with a higher rate of interest and sovereign guarantee, at the same allowing you to save tax. A family can open a maximum of two SSY accounts, one for each girl who should not be above 10 years of age at the time of account opening. A minimum annual contribution of ₹250 to a maximum of ₹1.5 lakh is allowed which is eligible for deduction as per Section 80C. Once the girl is 18, you can make a withdrawal of upto 50% of the account balance in the last year for her higher education. SSY has a 21 year lock-in period from the date when the account is opened and deposits need to be made for the first 15 years.
Equity linked savings scheme(ELSS): Both PPF and SSY are schemes from the government that fall in the debt category. However, if you are aiming for higher inflation beating returns over the long term, ELSS should be your best bet. These are the only tax saving investments in the mutual funds category. However, they also carry more risk. So research the funds extensively and choose funds in tune with your risk appetite to generate wealth over the long term. They come with a three year lock-in period. Once you are approaching your target, remember to shift to the safety of debt in order to prevent the erosion of the accumulated amount.
Unit Linked Investment Plan(ULIP): A ULIP is a dual benefit investment tool that not only provides a life cover but also helps your money grow by investing in the market at the same time providing tax relief. A lump sum or monthly amount is paid out to your family in your absence to meet their immediate financial needs. This ensures that your child continues with his education uninterrupted and your spouse is equipped to handle day to day needs. ULIP child investment plans allow for premium waiver upon the death of the policyholder so that investments do not stop. You can also strategically plan the payouts of the plan by factoring the key milestones in your child’s life such as when he or she completes school or college as per your needs.

These are some of the tax saving investments that you can include in your financial portfolio to meet the future needs of your child when he or she grows up. Canara HSBC Life insurance allows you to invest in 7 funds which range from equity, to debt and even a combination of both. 4 portfolio strategies can be chosen as per your risk preference.

You can also make partial withdrawals to fund any immediate needs and opt for the life option with premium funding benefit which not only disburses a lump sum amount in the event of the insured’s death but also takes care of the payment of future premiums as well. So choose an appropriate investment plan today so that your child can live their dream even when you are not there.

Child Insurance - Top Selling Plans

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Common Tax Mistakes Parents Make While Investing for Their Child

Here are some common tax mistakes that every parent should avoid

Not claiming deductions under Section 80C for premiums paid on child insurance plans.
Assuming all maturity benefits are tax-free without checking Section 10(10D) conditions.
Forgetting to report child insurance investments in tax filings leads to missed deductions.
Buying insurance in the child’s name instead of the parent’s may impact tax benefits.
Cancelling the plan before five years, making the tax benefits claimed earlier invalid.

Conclusion

These are some of the tax-free child investments that you can include in your financial portfolio to meet the future needs of your child when they grow up. Numerous plans by Canara HSBC Life insurance allow you to invest in various products as per your risk preference.

Thus, to ensure your child can live their dream even when you are not there, you can choose an appropriate child account tax-free investment plan.

Glossary

Section 80C: Indian Income Tax section that allows deductions for certain investments and expenses.
Lock-in Period: A fixed period during which investments cannot be withdrawn.
Inflation: General increase in prices and fall in the purchasing value of money.
Corpus: A large sum of money set aside for a specific purpose or investment.
Premium Waiver: A feature in insurance plans where future premiums are waived under certain conditions, such as the policyholder's death.

FAQs

Among the given options, the Public Provident Fund (PPF) is 100% tax-free in India. Both the interest earned and the maturity amount are exempt from tax, making it a highly attractive choice for tax-conscious investors.

Unit-Linked Insurance Plans (ULIPs) are an excellent investment for a child, as they offer the dual benefits of life insurance coverage and market-linked returns. With the flexibility to allocate funds based on risk appetite and the potential for long-term wealth creation, ULIPs ensure financial security and growth for your child's future.

In India, you can gift any amount of money to your son tax-free. Gifts received from specified relatives, including parents, are exempt from tax under Section 56 of the Income Tax Act, making it a tax-efficient way to provide financial support.

Yes, you can use a child insurance policy to avail of tax benefits beyond income tax. Premiums paid for such policies may qualify for deductions under Section 80C of the Income Tax Act, and the maturity proceeds are often exempt under Section 10(10D), providing comprehensive tax savings.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.