Child plans (ULIP and traditional) may be heavily advertised and sold by life insurance companies to create a corpus for your children, if you are a conservative investors, have you considered PPF as a better tool to build a corpus for your children? Apart from being tax-exempt, a PPF account cannot be attached by any court order or decree, although it can be attached by the income tax department. Indeed, a a combination of a term plan and PPF account in the name of your children may be far better than buy a child plan from a insurance company. The so-called child plans of life insurance companies come with a host of charges which will eat into your investment and your child’s education corpus may fall well short of the target.

If you do take this root of term plan plus PPF, ensure that the total investment in your PPF and the minor child’s PPF account (for whom you are the guardian) does not exceed Rs1 lakh in a financial year. Your Rs1 lakh investment will go towards 80C limit. Your contribution to the child’s PPF account will be deemed as a gift and clubbing provisions under Section 64 should apply. But since the interest on PPF is tax exempt, it does not matter. If the corpus on maturity of a minor child’s PPF is invested in an instrument which is taxable in nature, then the income arising from that instrument will be clubbed with that of the parent who has the highest income. However, if by the time the PPF matures, the child has become a major, the corpus will be the child’s asset; so its income will not be clubbed with yours. If you have a couple of minor children, open a PPF account for one minor with you as the guardian and other minor child’s PPF account with your spouse as guardian.

EPF (employees’ provident fund) and VPF (voluntary provident fund) are good options getting 8.5% tax-free income, as of now. While EPF contribution is limited to 12% from you and another 12% from the employer, you can put in 100% of your basic pay and dearness allowance in VPF. This qualifies for 80C tax savings. You can avoid PPF investment, if you utilise VPF properly. That way, a minor child’s PPF account can have Rs1 lakh invested each year which will create a good education corpus.

There is  one other issue. How to deal with FD clubbed interest? If you invest in fixed deposits in the name of your spouse or minors, you will have to include the interest in your income, due to the clubbing provisions for your gift. Even though there is no gift tax, clubbing provisions under Section 64 will be enforced. You have limited recourse to relieve this situation. There is an exemption of Rs1,500 a year for each child’s income, but it is limited to two children. Any income in excess will have to be shown in your tax returns until the child turns 18. Assuming 10% returns, you can invest Rs15,000 each in the name of two children to get tax-free interest.