No parent can avoid investing on behalf of children -- both for financing education and other reasons.

But what are the most tax-effective options now? Vinod Jain, a Delhi-based chartered accountant, says there are several options, but which one you should take will depend on the age of the child and the objective of the investment.

For example, if you begin investing when your child is just one year old, very-long term schemes like the PPF are ideal. But if you child is, say, 14 years of age, shorter schemes are more appropriate.

Moreover, if the money is for higher education or marriage, you need it around a specific time. If it is for emergencies -- like, say, an unexpected hospitalisation -- you need to keep encashability and liquidity in mind.

The tax aspects first: Jain points out that the income of minor children is clubbed with that of parents under section 64(1A) of the Income Tax Act. Not just any parent, but the parent with the higher income.

On the other hand, the income of major children is taxed separately. In this case, one can take benefit of various exemption limits and lower tax slabs apart from deductions and rebates. This suggests that as long as incomes are accruing while a child is a minor, it does not make much difference whether the investment is in the parent's name or that of the child.

On the other hand, if the income can be postponed till after a child becomes a major -- for example, investment in shares with a long-term potential -- holdings in the name of children make sense.

The advantage of keeping investments in your own name -- and not that of your child -- is that the money is under your control and not usable for purposes other than what you agree to. Also, as long as the gift tax stays abolished, there should be no difficulty transferring the money to children as a gift at a later stage.

After Budget 2003, the following are the main options available for those wanting to invest on behalf of their children:

• The 15-year public provident fund gives eight per cent tax-free interest. A minimum of Rs 500 and a maximum of Rs 70,000 per year (per parent) can be invested in the name of the parent and children put together.
• PPF permits borrowings equal to 50 per cent of the balance at the end of the preceding fourth year or the current balance, whichever is lower, after the completion of an initial term of six years. Interest earnings on PPF are -- as is well known -- fully exempt from income tax and a rebate under section 88 is permitted to parents if they earn less than Rs 500,000 per annum.
• An alternative investment is the monthly income scheme with post offices, with interest at eight per cent per annum (taxable) and a benefit of 10 per cent at the end of the sixth year. This can be coupled with a recurring deposit scheme where the interest earned on the monthly income scheme can be deposited directly by the PO to earn another eight per cent for a period up to five years.
• The other avenues which offer taxable eight per cent rates are Kisan Vikas Patras, where you initial investment doubles, the National Saving Certificate, and the Reserve Bank of India's new eight per cent Relief Bonds.
• The RBI has replaced its old seven per cent tax-free bond with a 6.5 per cent one for six years. For those in the top tax bracket, this is a better option than taxable eight per cent instruments.
• Another option could be investment in schemes offered by the LIC or HDFC Standard Life Insurance Company. LIC Komal Jeevan provides for a maturity age of 26 years with a maximum age at entry of 10 years. The sum assured could be from Rs 100,000 to Rs 25 lakh (Rs 2.5 million), and premia can be paid quarterly, half-yearly, or yearly.
• The LIC scheme is likely to give about six per cent return. It is completely non-taxable and investment in the scheme is additionally entitled to rebate under section 88. In case of sudden death of the parent, the sum assured is payable with some minimum return as guaranteed additions.

In the case of HDFC Standard, a maturity benefit plan, an accelerated benefit plan and a double benefit plan are available. All of them provide for payment of sum assured in case of sudden death. In the case of the double benefit plan, not only is the sum assured paid, but future premiums are waived and another payment is made on maturity. The rate of return in this case is also expected to be around six per cent per annum.

Child's play

All in all, the PPF is still a very good investment within the limits prescribed. Beyond that, post office schemes offer the best returns even after considering tax implications for people in the 30 per cent bracket. A part of the return would be subject to benefits under section 80L up to Rs 12,000.

The LIC and HDFC schemes are useful only for those who perceive high risks of sudden death or incapacity to earn. The LIC scheme does not guarantee any return and the same could go up or go down depending on several factors. The other schemes give guaranteed returns as specified at the time of investment.

Parents beyond the age of 55 years could also invest up to Rs 266,000 in an LIC Pension Policy that provides for a nine per cent assured return, as announced by the finance minister.

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