While planning for your children’s financial future, consider how to create wealth and ensure it is taxed efficiently. This helps to maximize what is transferred to the next generation. Let us explore available and practical techniques, such as using Section 80C benefits, setting up tax-preferred accounts, gifting, and estate planning integrated with tax savings.
Leverage Section 80C benefits
Section 80C of the Income Tax Act is a tax deduction option that reduces taxable income and helps secure your child’s future. Some valuable ways to use it are:
Invest in Sukanya Samriddhi Yojana (SSY): This government scheme provides tax-free returns and is eligible for a deduction under Section 80C for a maximum amount of Rs. 1.5 lakh. The SSY account may be one of the strong foundations for your girl child’s higher education or marriage.
Public Provident Fund (PPF): Investments under PPF are completely tax-exempt under Section 80C, and the corpus saved can be used for your child’s future needs, such as investing for your child’s education and avoiding an education loan.
Life Insurance Premium: Policies with your children as beneficiaries will help secure their future and help you save taxes under Section 80C.
Open tax benefit accounts for the children
Specialised accounts can be a smart way to reduce your taxable income while building a nest egg for your children:
Minor’s savings account: Open a savings account in your child’s name to channel small but consistent savings. Interest earned up to Rs. 1,500 per child annually is exempt from tax under Section 10(32).
Education loans for tax benefits: Higher education loans can be taken, and the interest paid thereon can be claimed as a deduction under Section 80E. The deductions are available for eight years from the year you start paying the interest.
Mutual funds: Children’s mutual fund plans are another option. Invest in mutual funds in your child’s name, mainly equity-linked savings schemes (ELSS). Since these funds have a lock-in period of three years, they offer tax benefits under Section 80C.
Utilise gifting for reduced tax impact
Gifting is a tax-effective and legal mechanism to transfer wealth to your children:
Tax-free gifts: Under Indian tax laws, gifts to children are exempt from tax. Parents can gift money, gold, property, or shares to their children free of gift tax.
Investment in their name: The gifted money can then be invested in tax-saving instruments such as a PPF or tax-saving fixed deposit schemes, reducing tax liabilities while building wealth.
Estate planning to be integrated with tax-saving techniques
Building generational wealth requires solid estate planning. This can be done tax-efficiently in the following ways:
Set up a trust: A family trust is often considered an efficient tool for passing wealth to your children. Trusts ensure that your assets will be managed and transferred as you wish while minimizing taxes as much as possible.
Designate your beneficiaries: Ensure that your children are the nominees on all instruments, such as insurance policies, mutual funds, and fixed deposits, for a smoother transfer of wealth. Tax benefits may vary depending on the instrument
Use Will planning: Making a Will ensures that your assets will be allocated in accordance with your intentions. While a Will provides no tax benefit, it prevents needless disputes in succession, thus allowing children to inherit wealth without trouble.
Plan for education funds and first-time home purchases
Some of the most expensive costs your children will incur are higher education and buying a home. Here’s how to create tax-efficient wealth for these milestones:
Systematic Investment Plans (SIPs): Begin with SIPs in equity funds, and over time, a decent corpus will build up for either education or the down payment on a home. Long-term equity investments are eligible for reduced capital gains tax.
Real estate investments: If you foresee real estate investments as part of their future, buy property in your child’s name. This will help them avoid paying property transfer taxes later and enjoy ownership at a much younger age.
Fixed deposits for children: Tax-saving FDs in your child’s name can offer stable returns and be utilized for specific milestones, like college admissions or the purchase of a first home.
Your approach to building wealth for your kids should be comprehensive, drawing equally upon investment planning, tax-saving tools, and estate planning. Section 80C advantages can be used optimally. Opening tax-advantaged accounts, combined with strategic gifting and estate planning, creates the best practice to provide a secure financial future for your children with reduced tax burden.
Start early, seek the advice of a financial advisor, and review your strategies periodically to align them with your family’s needs and changing tax laws. Remember, every small step today will make a massive difference in your next generation’s lives.
