Investing in Your Child's Education: Smart Strategies for the Future

Education financing has evolved significantly over the years. Changing dynamics in the education sector and soaring costs have made planning for your child's education a pressing concern. In the 1980s, a college education was affordable, with tuition fees often costing just a few thousand rupees. Back then, traditional investments such as Fixed Deposits (FDs), savings certificates, and gold were the preferred choices. Education was highly subsidized by the government.

However, the landscape changed as the economy opened up to the private sector, leading to a proliferation of new educational institutions and a subsequent increase in education costs. Fast forward to 2023, and education has become one of the most expensive necessities, with an inflation rate far exceeding the general Consumer Price Index (CPI).

Exploring Education Financing Options

Here are some ways you can consider funding your child's education:

1. Mutual Funds

Despite the remarkable growth in assets under management in the mutual fund industry in recent years, data from the Reserve Bank of India (RBI) shows that mutual funds attract only about 6 percent of household savings.

Mutual funds offer inherent benefits such as diversification, the potential to beat inflation, and professional expertise. With increasing financial awareness, more people might turn to mutual funds to finance their children's education. As of September 2023, there are approximately 4 crore mutual fund (MF) investors in India. However, there's room for significant growth, given that around 51 crore PAN-Aadhaar-linked accounts exist.

Mutual funds are well-suited to beat inflation in the long run, and their professional management allows investors to indirectly participate in the capital market without the need for daily monitoring.

2. Foreign Investment

For parents aspiring to send their children abroad for education, the Liberalized Remittance Scheme (LRS) is an option. Under LRS, individuals can send up to $250,000 annually from India and invest in foreign equity markets. This can serve as a natural hedge against foreign education expenses. Notably, the government doesn't collect Tax Collected at Source (TCS) for LRS up to Rs 7 lakhs for education or investment purposes, although TCS rates vary case by case.

3. Education Loans

As education costs continue to rise, education loans have become a popular choice. They offer the added advantage of income tax savings under Section 80E, where interest on education loans is tax-deductible.

At EduFund, we recommend parents create a diversified plan that combines personal investments, loans, and scholarships to optimally fund their child's education. RBI data shows a 17 percent increase in outstanding education loans in March 2023 compared to March 2022, indicating a growing trend of parents and students using education loans for higher education.

4. Government Subsidies and Scholarships

Government subsidies on education loans and scholarships, both from the government and private institutions, provide another source of funding for education. These scholarships support education in India and abroad and are often part of corporate social responsibility (CSR) initiatives.

5. Crowdfunding

Crowdfunding has gained popularity as an alternative source of financing for education. However, it's not the easiest way to raise funds, as many appeals compete for donations. Some donors are more inclined to give to medical and poverty alleviation causes rather than education. Moreover, donors may be skeptical about contributing to education needs without guarantees of academic success or stable job prospects.

6. Employer-Sponsored Education Benefits

Certain employers offer tuition assistance or reimbursement programs to help employees pursue further education. However, these programs often come with strings attached, such as requiring employees to stay with the organization for a minimum period.

Each of these options has its unique advantages and limitations. The key takeaway is that education financing is no longer a choice; it's a necessity. Fortunately, there are various avenues to explore, and with proper guidance, you can make a significant impact on your child's educational future.

What is Deposits In Companies

Normally Deposits are made with companies. Such deposits can also be made with private parties including deposits with friends, relatives, proprietary concerns as also with partnership firms. From the point of view of safety of the investment, the investment by way of ‘Deposits’ or Loans should be avoided. 

If the deposits are made with proprietary firms as well as with partnership firms, then the investment should only be made with known firms. The investor should invest very small portion of his funds by way of deposits or loans. While making deposit with a friend, or a firm or a relative always obtain a stamped receipt in respect of the amount invested by way of deposit. 

The stamped receipt should, in particulars of the cheque, terms of loan, and details of rate of interest and the details about date of repayment of the loan. Always make deposits by account payee cheque to avoid tax problem.

The deposit with a public limited company is a better mode of investment than by way of deposit or loan. The period of investment generally varies from one year to five years. The interest nowadays is generally between 6% to 10% p.a. depending on the maturity of the deposit. 

The investor gets the option to receive interest either monthly, quarterly, yearly or on cumulative basis. While filling up the form for deposit does mention clearly the mode of interest payment. Many public sector companies are also accepting deposits from the public. 

The investor’s confidence is more on the deposits made with a public sector undertaking. It has been our experience that the Public sector undertakings might be making huge losses but they have had a very good track record of timely payment of interest and principal amount. 

If an investor is interested to make investment by way of deposits, then he should better make investment in 4/5 different companies. The public sector undertakings should be given more weight age in selecting your investment for deposits. A big disadvantage of the investment in the form of deposits is that it cannot be withdrawn prematurely.

Deposit Schemes for Retiring Employees

In the year 1989 for the first time the 9% Deposit Schemes for retiring government employees was launched. The salient features of this schemes were that it was open to any retire Central or state Government employee or retired employee of a public sector company. 

The retire employee should have opened a bank account for depositing the money under this scheme within three months from the date of receiving the retirement benefits, in selected branches of State Bank of India and its subsidiaries. In case the retirement benefits were received in installments, multiple deposits could be made. 

There are exhaustive rules for nomination, premature encashment etc. The interest on balance lying in the deposit account is completely exempted from income tax under section 10(15)(iv)(i) of the I.T. Act. Similarly, the entire amount of money lying in this account is exempted from wealth tax. 

The Finance Act, 1992 had substituted the existing sub-clause (10c) of section 10 with effect from 1.4.93, whereby the benefit of tax exemption of voluntary retirement payment received has been exempted not only for public sector company employees or State Government employees, but even employees of any private sector company. 

Thus as a result of the amendment of section 10 (10C) of the Income Tax Act, 1961, a very liberal attitude has been shown to the employees of all corporate undertaking who are taking the benefit of voluntary retirement schemes announced by their company. Detailed rules to this effect have also been made. These are known as Income Tax (16th Amendment) Rules 1962, which define various guidelines for the above purpose. 

Even under the amended scheme, there is no wealth tax on the amount deposited in this scheme. The rate of interest is 8% for deposits under this scheme. With effect from 9-7-2004 this investment option would not be available as the scheme has now been scrapped.

Zero-Tax- Investment

The most sections of the Income Tax Act which lead to Zero-tax- Investment relate to the provisions as contained in section 10, and section 80C. First up all Zero-tax could be achieved by making investment in certain Bonds and securities of the government which are completely tax-free. For example, the dividend income, income from tax-free bonds, income from mutual funds, and so on.

 Another mode of investment which helps achieve zero-tax investment is by making investment in certain specified areas so as to get the full benefit of section 88 of the I.T . Act, 1961. The optimum planning of investors, therefore, can be achieved by making zero-tax investments in terms of provisions of the Income Tax Act, 1961 as contained in sections 10, and section 80C of the Income tax Act , 1961.

In respect of tax deduction on tax under Section 80C, the maximum eligible amount is Rs 1, 00,000. Some of the important items in which investment can be made to achieve tax deduction under the overall limit of Rs. 1 Lakhs are investment in PPF, PF, NSC,NSS, Equity lined Savings Schemes, 5-year Bank Fixed Deposit, 5-year P.O .

Deposit Schemes and Senior citizen Savings schemes. Besides, within the above limit one can also make repayment of housing loans and tuition fees for two children to avail the said deduction. The contribution made by a tax payer to the Pension Plan also enjoys the above tax deduction within the overall limit of Rs 1 Lakhs tax deduction. 

The best zero-tax investment would be in shares of companies because the entire dividends in the hands of a shareholder will be completely exempt from income tax under Section 10(34) of the I.T . Act, 1961.

The income received in respect of all units from the Unit Trust of India or any Mutual Fund would be fully exempt from income tax in the like manner as dividends under Section 10(35). 

This is applicable for all categories of tax payers. The 6.5% Savings Bonds, 2003 is one very attractive zero-tax investment proposal which was available from the Reserve Bank of India. The entire interest income from this Bond is fully exempt under the Income Tax Act, 1961 . 

 Presently the investment in these bonds cannot be taken advantage of because they have been scrapped. The investment in listed securities and units of an equity- oriented mutual Funds also result into zero tax for the investor because there is no tax liability on long-term capital gains arising from the sale of listed securities and units of equity-oriented fund in case they are held for more than one year and securities transaction tax paid. The post office savings account interest is fully exempt from income tax.

Income Tax Free Investments

Popularly known as Zero-Tax Investments, these are investments so made that there is no liability to income tax at all. These investments are broadly mentioned in section 10 of the I.T Act, 1961. First of all, the investment which is completely income tax free is investing in post office savings Account. Similarly, the Public provident Fund Account interest on which is @ 8% , is also completely tax-free. 

Likewise, the interest income from tax-free Bonds issued by Reserve Bank of India is also completely exempt from income tax. Public sector tax-free Bonds bearing interest of 8.5% or 9% are also completely exempt from income tax. The 8.5% or 9% Tax-free Public sector bonds are for a 10- year’s period. 

For some time certain public sector bonds of 10%and 10.5%were also being issued. New tax free Bonds by various Municipalities are also being issued. These bonds are completely secured and no income tax is deductible at source. The Reserve Bank of India has now stopped issuing tax-free bonds. Please watch for details in respect of certain tax-free bonds which are issued from time to time. The above are some of the very important tax-free investments.

Particularly in respect of persons with a high income the investing in tax-free bonds is really very lucrative. The dividends received from various companies are also fully exempted from income tax. Entire income on units of UTI as also other Mutual Funds would be completely exempt from income tax. The gains on selling the units of UTI/Mutual Fund would be taxable. 

However, the long term capital gains in respect of listed securities on which securities transaction tax has been paid are fully exempted from the purview of payment of income tax. Likewise , the long –term capital gains would not be levied in the case of equity oriented mutual funds..

Bond Investment - Saving Bonds 2003

The Reserve bank of India had come out with two interesting Saving Bonds. These Bonds are known as 6.5% Savings Bonds, 2003 (Non Taxable) and 8% savings (Taxable) Bonds 2003. The erstwhile7% Savings Bonds as also the 8% Relief Bonds were discontinued long ago. Both these bonds make a very interesting investment option being available to the selected clients. Thus, it may be noted that both these bonds are not freely available for investment to all categories of tax payers. We will discuss the salient features of both the Bonds and finally at the end an equitable analysis has been made of prudent investor to decide whether to invest or not to invest in these bonds. The 6.5% Savings Bonds. 2003 (Non –taxable) are not available for sale now. We now discuss the salient features of both these investment instruments from the Reserve bank of India.

Salient Features of 6.5% Savings Bonds, 2003 (Non-Taxable)

As the name suggests, these bonds are non-taxable. Thus, the interest derived from these bonds is non-taxable. It therefore implies that these bonds would bring to the investor a net, return of 6.5% only. The interest amount would therefore be fully exempt from income tax without any upper limit. Thus, the net yield to the investor after taxes would also be 6.5% p.a. If we would like to find out the gross yield on investment in these bonds then we find that the gross pre tax yields in these bonds would be higher.

Presently, these 6.5% Saving Bonds.2003 (Non-Taxable) are not available for sale. They have been suspended by the government. However, those tax payers who are holding possession of these Bonds would continue to enjoy tax-free interest income from these Bonds.

Salient Features of 8% Savings Bonds, 2003 (Taxable)

As the name suggests, these bonds are taxable i.e the interest earned on these bonds would be taxable under income tax act 1961. These bonds are open for investment from 21-4-2003 until further notice. The bonds can be held by an individual who is a resident in India. Thus, even the NRI cannot make investment in these bonds. The individual and HUFs can make investment in these bonds. Besides, all charitable trusts and institutions which are registered as charitable institution or a university would also be eligible to make investment in these bonds. These bonds would also be issued for a minimum amount of Rs 1,000 and in multiples thereof. However, there is no upper limit of investment.

These Bonds are issued only in the form of Bonds ledger Account and may be held at the credit to the holder in an account called Bonds Ledger Account (BLA). The nomination facility for these bonds is exactly as per the nomination facility available for the 6.5% saving Bonds, 2003. These bonds which are to be issued in the Bonds Ledger Account shall not be transferable. The bonds will be repayable only on the expiration of six years from the date of issue.

The Bonds, shall not be traded on the secondary market and shall not be eligible as collateral for loans from banks, financial institutions and non banking financial company (NBFC) etc. These bonds will bear interest at rate of 8% per annum. Interest on non-cumulative bonds will be payable at half-yearly intervals from the date of issue or interest on cumulative bonds will be compounded with half-yearly rests and will be payable on maturity along with the principal, as the subscriber may choose. In the latter case, the maturity value of the bonds shall be Rs.1, 601 (being principal and interest) for every Rs. 1,000 (nominal). Interest to the holders opting for non-cumulative bonds will be paid from date of issue above up to 31st July/31st January on 1st August and 1St February. Interest on bond in the form of “Bond Ledger Account” will be paid by cheque /warrant or through ECS by credit to bank account of the holder as per the option exercised by the investor/holder.

These bonds are taxable hence income-tax would be deducted at source while making payment of interest on the non-cumulative bonds from time to time and credited to Government Account. Tax on the interest portion of the maturity value will be deducted at sources at the time of payment of the maturity proceeds on the cumulative bonds and credited to Government Account. However, tax will not be deducted while making payment of interest/ maturity proceeds as the case may be, to institutions which have made a deduction in the application from that they have obtained exemption from tax under the relevant provisions of the I.T Act and have submitted a true copy of the certificate obtained from I.T Authorities.

Kisan Vikas Patra

Kisan Vikas Patras are available from post office. They are in the denominations of RS 1000 , RS 5,000 and RS 10,000. There is no upward limit for making investment in Kisan Vikas Patra. With effect from the period of maturity is 8 years and 7 months. The yields of this investment worked out to about 8%. Premature encashment of Kisan Vikas Patra Is permissible after 2-1/2 years. These are completely exempt from wealth tax. However, with regard to income tax there is no tax benefit at all in respect of either making investment in Kisan Vikas Patra or the interest income from Kisan Vikas Patra, as the interest income is fully taxable. For Persons desiring to have a fixed source of income and not much concerned about the liability or having an income below the taxable limit of income, this is a good investment.

If Kisan Vikas Patra issued on or after 1st day of March, 2003, is encashed at any time after the expiry of two years and six months from the date of issue of the certificate, the amount payable inclusive of interest shall be specified in the table given below for certified of the denomination of RS 1,000 and at proportionate rate for any other denomination, namely:

Date of issue of the  certificate        Amount payable inclusive 
to the date of its encashment            of interest (in rupees) 
2 Years 6 months or more 
but less than 3 Years                      1,170.51
3 Years or more 
but less than 3 years 6 months             1,207.95
3 Years 6 months or more 
but less than 4 Years                      1,267.19
4 Years or more  
but less than 4 years 6 months             1,310.80
4 Years 6 months or more 
but less than 5 Years                      1,355.90
5 Years or more 
but less than 5 years 6 months             1,435.63
5 Years 6 months or more 
but less than 6 Years                      1,488.49
6 Years or more 
but less than 6 years 6 months             1,543.30
6 Years 6 months or more 
but less than 7 Years                      1,649.13
7 Years or more 
but less than 7 years 6 months             1,713.82
7 Years 6 months or more 
but less than 8 Years                      1,781.06
8 Years or more 
but less than 8years 6 months              1,850.93

Investing in Buildings

Investing in Buildings

Investment in building is very important from point of view of tax planning. While a building in a big city is beyond the reach of most people because of its very high price, even today one can buy a building in smaller town.

Joint Ownership

If a building is brought by different co-owners, it is better that clear mention be made of the % of ownership in the building of different co-owners in the conveyance deed. Likewise , all co-owners must contribute funds towards the total cost of the building prorate, ie on the basis of their share in the property. Also, in order to avoid problems at a later stage, the co-owners must prepare an agreement whereby they can make a clear cut demarcation of the property by metes and bounds in the names of different members of the family.

Freehold or leasehold

To get a fair idea of the price of a property, it should first be ascertained whether the property is in a freehold area or a leasehold one. As a prudent investment, the property should be in a freehold area, so that there is no problem while selling the property to various government agencies like Delhi Development Authority, Pune Development Authority, Madras Development Authority and so on , at the time of selling the property.

Rental Income

Once more than one person making the investment in a building, they are entitled to receive the rent jointly. The rental income received is liable to income tax in the hands of the various owners in the ratio of their ownership in the property.

Taxes

All commercial buildings are exempted from wealth tax. Like wise, irrespective of the size of the residential house is completely exempted from wealth tax. The residential houses would be exempted from wealth tax if it is given on rent for a minimum period of 300 days in a financial year. Similarly the tax payer has a choice to claim exemption in respect of either one residential house property or a vacant plot of 500 sq.meters.

Factory Building

As in any other property there could be different co-owners of one factory building. If a factory. If a factory building is used for carrying on one’s own business or profession, it is entitled to depreciation. However, no depreciation is allowed on the cost of the building. Similarly, letting out of a factory building with plant and machinery on lease would again not be income from business or profession but income from other sources. This distinction should be understood very clearly, particularly from the point of view of tax aspects connected with losses in business and their carry forward. The factory building used for any purpose would be fully exempt from wealth tax.

Tax Planning-Part 1

Key Points To Keep in Mind

When Making any investment it is very important to work out its tax implication because net return from an investment, after taking into account applicable income tax and wealth tax.

Whenever possible, investment strategies should be designed to achieve low or nil tax on one's investment. Taking advantage of PPF, Tax free bonds, mutual funds etc would also help in planning tax free investments.

Secondly it is usually beneficial to consider one's overall family investments, rather than looking piecemeal at investment for a single individual in the family. This aspect is important so that the income derived from various investment can be spread among the various family members and thus attract lower income tax.

Likewise, investment in the names of different family members should also be made in such a manner that the head of the family does not have to face any problem at any future point of time in case he wants to reshuffle investment in the names of different members of the family. Personal and family investments should also keep in view aspects relating to inheritance at a later stage. Accordingly, You may go in for joint purchase of properties, maintaining joint bank account and nominations in various investments.