Tax Advantage of Investing in a Child Savings Plan
Investing in a child savings plan is one of the best ways to safeguard the planning for your child's future while enjoying excellent tax benefits. Not only will you build up an emergency fund to face college expenses and various other payments, but they also enjoy the benefits of tax deductions under Section 80C of the Income Tax Act. This article delineates the tax-saving advantages of a child savings plan and why it is imperative to create one at the earliest for the bright financial future of your child.
Tax Benefits of a Child Savings Plan
A child savings plan offers various tax advantages under Section 80C of the Income Tax Act. The section is an opportunity for you to avail deductions on investments in specific financial products, such as a child savings plan. This is how the tax advantages are offered:
Tax Deduction on Contributions
Investments under a child savings plan are deductible from income tax under Section 80C. You can claim an allowance of ₹1.5 lakh in a year on such investment. This reduces your taxable income, lowering your overall tax liability.
Tax-Free Maturity Benefits
The maturity value of the child savings plans is generally tax-free, provided that the plan complies with the Income Tax Act. This implies that your returns on your child's investment are not taxable under Section 10(10D), provided the premiums do not exceed 10% of the sum assured.
Tax Advantages of Long-Term Investments
Most child savings schemes, for example, those that invest in equity-linked products, provide long-term relief from capital gains tax after a period of holding. For equity-linked savings plans (ELSS), long-term capital gains up to ₹1 lakh are tax-free, but gains exceeding ₹1 lakh are taxed at 10%. The returns at maturity are free of tax, ensuring that growth in your child's savings is not subject to capital gains tax.
The Power of Compounding: Start Early for Greater Benefits
Starting early with the child's savings plan allows you to benefit from the compounding effect. That is, you earn interest on your initial deposit as well as on interest that has already accrued.
Long-Term Growth Potential:
Even modest, regular contributions can grow significantly over time, especially with the power of compounding, ensuring that by the time your child reaches adulthood, the accumulated savings will be substantial.
Tax Relief over the Long Term:
The tax relief that you accumulate every year on your contribution will also build up, providing you with consistent relief over the investment period. This is another long-term financial advantage of early investment.
Types of Child Savings Plans and Tax Benefits
There are different child savings plans that offer different benefits, one of which is tax benefits. Here are some of them:
Public Provident Fund (PPF)
Tax Benefit: Tax-deductible under Section 80C.
Returns: Tax-free returns on maturity.
National Savings Certificate (NSC)
Tax Benefit: Contributions qualify for tax exemption under Section 80C.
Returns: The interest is taxable, but the principal amount is safe.
Child Insurance Plans
Tax Benefit: Premiums are exempted under Section 80C.
Returns: The Maturity amount is tax-free.
Systematic Investment Plans (SIPs) in Mutual Funds
Tax Benefit: ELSS mutual funds offer tax deductions under Section 80C when invested through SIPs.
Returns: Higher returns, but with greater risk.
A Wise Investment for Tax Saving and Your Child's Future
A child savings plan is a good investment to save taxes and provide for the future of your child. By investing early on, you enjoy the advantage of taxes along with the advantage of long-term growth through compounding. Whatever you invest in a PPF, NSC, child insurance plan, or SIP, all have their own advantages. By starting early, not only are you maximising your tax savings but also giving your child a strong economic grounding for the future.
