Life-changing Events

When a child is born, the parents have to plan for his / her future needs. There are various requirements that must be fulfilled, like school fees, medical expenses, money to be set aside for higher studies, marriage etc. Investments made with a view to meeting such needs may have tax implications.

Investments with a view to meeting your child's future needs can be made in two ways. If made in your own name, the income generated from such an investment would be added to your own income and your taxable income could increase accordingly. But if made in your child's name (the child being a minor, of course), you would need to obtain a Permanent Account Number for him / her. You can obtain a PAN through Taxsmile.

As a parent you might want to make sure that by the time your child grows up, s/he has a certain amount of capital already built up. You may decide to gift your child an amount periodically and invest the same in his / her name. The investment will generate an income, which might have a tax implication. If this income exceeds Rs.1500 annually, it is added to the income of the parent whose annual income is higher. This means up to Rs.1500 per child per year is tax-free.

Interestingly, if your child has a special skill (for example singing or chess) that generates an income for him / her, such income will not be added to your / your spouse's income, according to judgments given by Courts of Law in India. So it is important that you start planning right from when your child is born or before giving your child a monetary gift. By doing so you will pay as less tax as possible while at the same time complying with the Law.

Some people might want to create a Hindu Undivided Family (HUF) upon the birth of their first child as it results in a new, separate entity. In some transactions this may help by spreading out actions over several members rather than a single individual. Although many tax experts push their clients for such a move, it is important to consider if the HUF will actually ease the tax burden. There are certain procedures that need to be completed for the creation of an HUF. Only after taking into account all factors should one proceed with this move.