Financial dependency of children on parents in India is generally up to completion of graduation. (This assumption is applicable for financial well off families).
Parents can get some relief from Income Tax as soon as their child becomes MAJOR i.e. 18 yr’s by gifting a lump sum amount to their child. Let’s C HOW;
If parents deposit money or make a Fixed Deposit or invest in any interest bearing instrument in the name of MINOR child, interest credited will be taxable in the hands of the parents. This is known as Clubbing of income.
In case the child is MAJOR, clubbing of income provision will not take place & interest will be taxable in the hands of Major son/daughter.
Here is a CATCH ; Since income up to Rs. 2,00,000 p.a. is not taxable in the hands of an individual, Major child need not to pay tax on interest amount up to Rs. 2,00,000.
An example will help you better understand the whole scene:
Parent Name: Mr. Suresh
Age: 50 yr’s
Occupation: Bank Manager
Salary: Rs. 60,000 p.m.
Child name: Rahul
Age: 18 (Major)
Education Qualification: 1st yr of Engineering
Monthly expenses ( other than tuition fee, can be pocket money or other regular expenses ): Rs. 10,000 p.m.
Now, to meet out Rahul regular expenses, Mr. Suresh has two OPTIONS :
Option 1: Mr. Suresh pays for monthly expenses of his child from his salary income.
Option 2: Now this is Interesting. Mr Suresh has fixed deposit of Rs. 20 lac with bank @ 8.5% pa. Interest per annum comes out to be Rs. 1,70,000
From his monthly salary it’s clear that he comes in 20% tax bracket. Tax on interest amount from fixed deposit comes out to be 1,70,000*.2 = Rs. 34,000.
Mr. Suresh needs to GIFT Rs. 14,20,000 out of Rs. 20,00,000 to his MAJOR child to meet his regular expenses of Rs. 1,20,000. Interest of Rs. 1,20,000 on FD worth Rs. 14,20,000 will not be taxable to his child as it is below the exemption limit of Rs. 2,00,000.
Thus tax saved by Mr. Suresh : 1,20,000*.2 = 24,000.