Whether it’s the ever increasing tuition fee or global education becoming a common phenomenon, in today’s times, planning your child’s future from an early stage is crucial. To do so, a child plan is the first step. “It is a savings-cum-insurance plan designed to meet the financial needs of your child in the future. These plans are designed to help parents manage education costs, marriage, and offer benefits at different stages of life. These are comprehensive plans that allow parents to collect adequate funds before time to manage future expenses related to their child,” says Harsh Jain, co-founder and COO at Groww, an app-based investment platform.
When it comes to savings/insurance plans, there are a bevy of options available. Thus, it’s important to understand what each entails. Jain lists down various options and what they mean for those signing up for them.
Child Endowment Plans – In these plans, the premium paid by you (parents) is invested in instruments of debt. These are low-risk investments and are designed to generate low-to-medium returns on your invested funds. They offer tax benefits under Section 80C of the Income Tax Act, 1961.
● Guaranteed Returns Plans – These plans offer an assured amount on the completion of maturity (something like a term deposit). This is a safe way to plan for your child’s future as the risks are very low.
● Market-Linked Plans – Unit-linked Insurance Plans or ULIPs are a great example of market-linked child plans. These plans invest a majority portion of the premium paid by you in market-linked instruments. These plans are highly flexible and offer liquidity after a mandatory lock-in period of five years. They also offer tax benefits under Section 80C and Section 10 (10D) of the Income Tax Act, 1961.
● Child Insurance Plans – These are life insurance plans and are available in two variants:
o Single Premium – where the parents pay a single premium every year instead of installments
o Regular Premium – where the plan offers a monthly or quarterly premium payment option
There is no doubt that a clear understanding will prevent you from making incorrect decisions. However, it is also expected that you keep a few points in mind when finalising a plan for your child/children.
• First, the rate of inflation: “This is important because what costs Rs 5 lakh today can double in a few years. Hence, estimating the cost of education by factoring in the rate of inflation is important,” opines Jain.
• Second, tenure of the plan: “This depends on how soon the parents decide to buy the plan. If they are buying it when the child is in kindergarten and want to use the funds for his/her school or early college costs, then the tenure needs to be around 10-12 years. If the plan is being purchased to support only higher education costs (post class XII), then the tenure must be chosen accordingly.”
• Third, turn of events: “This crisis has taught us that life is unpredictable and things can go downhill overnight. Thus, it is advised that partial withdrawal clause is present in the plan. Finally, most child plan providers offer a range of add-ons or riders to help customise the plan based on the parents’ requirements. Some such add-ons are premium waiver rider, death rider, accident benefit, critical illness rider, etc. It is important to go through all riders and choose the one best suited to the financial plan.”
TAX BENEFIT
Just like every investment, child plans, too, come with tax benefits. Jain enlists them on the basis of the plan you choose.
Tax benefit on premium
The premium amount paid for a child plan can be deducted from your taxable income up to a limit of Rs 1.5 lakh per annum. This is as per Section 80C of the Income Tax Act, 1961.
Tax benefit on income from a child plan
Any income from a child plan is tax-free as per Section 10 (10D) of the Income Tax Act, 1961.
Parents of children with special needs
Parents of children with special needs can claim the following tax deductions:
i. Up to 33 per cent deduction for the money spent on the child’s treatment under Section 80DDB of the Income Tax Act, 1961
ii. Deduction of up to 40 per cent on expenses relating to a minor disability of the child under Section 80DD
iii. Deduction of up to 80 per cent on expenses relating to a major disability of the child under Section 80DD