We have already seen how by planning their taxes over the last five years, Ashok and Revati Manchanda have not only acquired personal vehicles and a house, but have also made a few longterm investments to assure for themselves a comfortable post-retirement lifestyle. This is despite the fact that Ashok is only 33 years old and has about 25-30 years of work ahead of him.The long-term plans chosen by the couple include several things, among them investment in the Unit Trust of India's Senior Citizen Plan, which would entitle the couple to an annuity of Rs 1,32,000 a year after the age of 58, or alternatively, withdraw the entire amount, aggregating Rs 11 lakh, upon attaining the age of 61. Not just that, Ashok and Revati will have also secured access to UTI's hospitalisation benefits scheme with an individual lifetime medical cover of Rs 7.5 lakh. They can avail of this limit after 58 years of age, irrespective of whether they opt for the annuity or a one-time settlement.
Another of their investments is Rs 2,52,000 in the Post Office Monthly Income Plan, wherein an amount of Rs 2,310 will be credited every month into their joint post office savings bank account and utilised for the payment of insurance premia against a 20-year endowment with profits Life Insurance Corporation policy. Apart from insurance cover during the interim period, the beneficiary will receive approximately Rs 11 lakh upon maturity, as a tax-free payment.
Revati has also opened a Public Provident Fund Account in which the opening balance as on April 1, 2000, marginally exceeded Rs 50,000. She intends to deposit another Rs 4,000 during the current financial year; from next year onwards, she will deposit only Rs 1,000 per annum just to keep the account alive. That is because her contribution to the bank provident fund, coupled with the principal loan repayments to the extent of Rs 20,000 per annum, will be adequate to maximise her tax relief under Section 88. She also hopes that her income from the bank during the intervening period would have risen sufficiently to obviate the need for more PPF contributions.
Based on this premise, Revati expects that the balance available in her PPF account (which does not attract income-tax) 30 years hence when she turns 60, would have accumulated to Rs 15,70,449. This is adequate to generate an annual post-retirement tax-free income of Rs 1,72,750 by way of annual interest earned.
Both Ashok and Revati are members of their respective company provident fund schemes wherein their opening credit balances after completion of five years' service were Rs 2.5 lakh and Rs 1.8 lakh, respectively. As a thumb rule, these balances treble every five years with matching employer contribution at 12 per cent and average annual increments of 10 per cent and a promotion with additional raise thrown in every 5-6 years. Given a working span of 35 years, the growth of the provident fund account is expected to grow up to Rs 18 crore and Rs 13 crore for Ashok and Revati respectively.
That might sound unbelievable, but it is true. With their old age sufficiently provided for, the Manchandas' thoughts are now naturally turning to making a tidy provision for their child(ren)'s future. Before delving into the mechanics of that, let us understand the income-tax laws that affect a minor child's income.
The income of a minor child is clubbed with that of the parent earning a higher income.Any income derived from a gift given by a parent to a minor child is taxed in the hands of the higher earning parent till such time as the child attains the age of 18 years.Any income deferred or that accruing to a child after attaining majority belongs to the child and not the parent.Gifts given by grandparents or siblings cannot be clubbed with the parents' income.If a minor child earns an income through his own endeavour, either by way of performance in sports or arts, then such income, even though managed by the parent, continues to belong to the child and is not clubbed with the parents' income. Such a child will be taxed as an independent income-tax assessee and it would be incumbent upon his parent/guardian to file the appropriate income-tax return on his behalf.Similarly, if the parents or grandparents form a trust for the welfare of their children/grandchildren register the trust with the Income-Tax Department, then any income disbursed by the trust to the minor or adult child will be taxed as the child's income and not clubbed with the parent's income.Any scholarship or donation received by the child, apart from the parents, also belongs to the child.All withdrawals made from a minor's bank account require pre-certification from the person operating the bank account on the minor's behalf that the withdrawal is for the exclusive use and benefit of the minor child.It therefore follows that if parents have to make any investments to build a corpus for the child, then it should either be in tax-free instruments like the Public Provident Fund Account of the child or the 9 per cent Relief Bonds of the Reserve Bank of India. Alternatively, there could be other instruments/schemes that are either specifically intended for the benefit of the child, such as the LIC's Children Money Back Policy, or those that offer a deferred payment of interest.
All these instruments should have a long gestation period and mature preferably after the child has attained majority. LIC Money Back policies not only insure the life of the child for as long as the policy is operational (after he has attained the age of seven years or the policy has been in force for two years, whichever is later), but also provide for payment of bonuses that are computed on an annual basis. However, the bonuses are paid out when the child attains the age of 26 years. LIC offers three schemes under this classification.
However, if insuring the life of the child is not as important as capital accumulation, then one should consider investing an amount equivalent to the premium in the child's PPF account for an identical term of 18 years.
Thereafter, if required, one could undertake withdrawals in the same manner as one would receive the benefits from LIC. It would be observed that the investor would receive 32.67 per cent additional benefit. The accompanying graphic compares capital formation under the two schemes.
This amount is Rs 1,03,900 more than the LIC settlement amount, notwithstanding the fact that settlement takes place one full year ahead of LIC, that is at the beginning of the 26th year. However, under PPF, the investor also has the option to defer interim payments and thus receive the sum of Rs 5,54,120 at the end of 25 years.
Taking a cue from this analysis, Ashok and Revati have decided to open a PPF account in their son's name with a monthly input of Rs 3,500 per month. A sum aggregating Rs 10,50,000 will be deposited over a period of 25 years. In a span of 25 years, this would generate a corpus of Rs 52,50,000 for their son when he is 25 years old, provided of course that no interim withdrawals are made.
Ashok is also considering pre-payment of his home loan over the next three years so that he is able to think of investing in an independent home.
Copyright © 2000 Indian Express Newspapers (Bombay) Ltd.