Investing for your minor children

Take education as an example. This is one goal that is important to all parents. Educational expenses occur from time to time, therefore any investment made for education should generate periodic income which can be utilised, as and when the need arises.

If the marriage of a daughter seems more important, the investment should be planned so that funds are available just prior to the expected time of the wedding.

In case providing a lump sum to your child when he/she enters adulthood whether to start a business, set up professional practice or for higher education abroad, planning should be timed so that the investment matures at the right time.

Finally, any child could be faced with a situation of the unexpected demise of either both, or the earning parent. To provide for such a contingency, it is recommended that parents invest in an instrument that will give a regular income year after year. We cannot emphasise strongly enough that investments for a child should be risk free, fully secured - even if the returns are not as attractive as some fancy schemes advertised from time to time.

Thus, before making an investment, make sure of the following:

1. Safety of the funds invested;
2. Liquidity, mobility and lock-in period of the investment;
3. Timely repayment on maturity; and
4. Tax benefits.

Irrespective of the purpose of investment, one permanent feature to be kept in view is that all such investments (no matter if the money was a gift from others or from the parents) will be clubbed with the income of the parents, if it is meant for a child. Section 64 of the Income Tax Act is clear on this matter. From this point of view, it may be worthwhile for high tax-bracket parents to invest in tax-free investment schemes even though yield is lower.

Please note that although all income derived from investments made in the name of a minor child are clubbed with the parent's income for tax purposes, this is so only till once the child attains adulthood. Thereafter, any income from the child's investments can be treated as income earned by that person and therefore, best left alone. An investment for a child's future should be risk-free and fully secured.

When the funds invested for a child accumulate to a substantial amount, it is highly recommended that the amount be invested in various units of mutual funds. This is mainly because of the fact that the entire income which is derived by a minor child from mutual funds is fully tax-exempt. It is also recommended that the investment may also be considered in cheap lend so that the investment appreciates in years to follow.

Some parents favour jewellery or gold, especially for a girl child. Although it is not perceived as a good investment any longer compared to most of the other investments mentioned above, if you must buy jewellery, it should be out of money specifically "owned" by the child (out of investments made for the child). Do remember that investment in gold ornaments should be need based only.

Investment in Public Provident Fund is also a very good investment, especially for a minor child. The investment in bank fixed deposit is not a very good investment for the minor child particularly in view of the fact that the income of the minor child is clubbed with the income of father or mother of the minor child. Investments in Zero Coupon Bonds could also be considered for the purpose of investment in the name of minor children.

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[Excerpt from 51 Income Tax Tips for Investors by Subhash Lakhotia. Published by Vision Books.]

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