Savingwala

Why Fixed Deposits are not good for your child

In many households across India, when a child is born, the first financial investment in his name is a PPF account . Such is the draw of the assured 8% tax-free income that parents overlook everything else-the impact of inflation, their own asset allocation , even the rules that govern the government-managed saving scheme.

According to rules, an individual cannot deposit more than Rs 70,000 a year in his PPF account. This limit does not increase if he opens another account for his minor child. The contribution in the child’s account is clubbed with the parent’s limit of Rs 70,000 per year. So, if you invest Rs 10,000 in your child’s account this year, you can invest only Rs 60,000 in your own. “If the maximum limit remains the same, you are cutting back on your own retirement planning by investing in the child’s name,” says Pankaj Mathpal, a financial planner.

It’s no different when it comes to fixed deposits. The interest earned on fixed deposits is fully taxable. “If you invest in a child’s name, the income earned is clubbed with that of the parent who earns more and is taxed at the applicable rate,” says Hiten Shah, senior manager with Deloitte Haskins & Sells. This makes fixed deposits one of the most tax-inefficient investments for your child. If the deposit rate is 9% and the parent falls in the 10% tax bracket, the effective post-tax rate will be 8.1%. In the highest 30% bracket, it will be 6.3%. “The post-tax return from a fixed deposit will not be able to beat inflation,” says Lovaii Navlakhi, chief financial planner, International Money Matters.

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