DEPENDING ONLY ON FIXED DEPOSITS FOR YOUR CHILD’S FUTURE ?

Talking about the cost of education is important since this is what you wish to cover through a child education plan. Considering the changing lifestyle, dynamics and education facilities, you must understand that:

1. It is highly likely that your kids will look for better options away from the home city or even the home country to pursue their higher education

2. Looking at the current inflation in education, there will be a steep rise in the cost of education irrespective of field or specialization

3. Multiple degrees or additional professional courses will become a norm

1. Provide for the tuition cost as must as possible

2. Secure dreams of your child even in your absence

3. Fund any entrepreneurial activity from the initial stages of interest

4. Fund extra training/certification

Now that we have established the uncertainties in determining the cost of education, it is time to consider the inflation effect as well. Over the past fifteen years, Indian education expenses have seen an average annual raise of 7% p.a.For instance, the fee of a two-year course at IIM Ahmedabad is Rs 21 lakh, which is 400% higher than what it was in 2007. If the fees continue to increase by an average of 20% every year, it will approximately reach Rs 95 lakh by 2025. (Source: The Times of India)

Consider the most popular combination among the Indian students – B. Tech + MBA:

The current cost of four years B. Tech course would be about Rs. 5 to 10 Lakhs for top institutions (Source: com)

Two-year MBA from one of the top B Schools will be another Rs. 15 to 20 Lakhs (Source: careers360)

So, in total, you should aim at saving about Rs. 30 Lakh for your child’s education as per today’s cost. If your child is under five years of age when you start planning, your investment must generate this money within the next 12 to 15 years.

You may be tempted to start a fixed deposit owing to the simplicity of the product. That is, you know the rate of interest, and you can choose the term of your choice. For more convenience and regular investing, you may select a recurring deposit, which also gives you a fixed rate of interest, but you can invest smaller amounts every month.

Even though fixed deposits are convenient; they may not be efficient when it comes to achieving your goal. Let’s see how:

You are investing in your goal of accumulating Rs. 30 Lakh within the next ten years. If the fixed deposit pays 7.5% p.a., your investment record may look something like this:

* Assuming you fall into 30% tax bracket

However, as the interest on bank fixed or recurring deposits is added to your taxable income each year, it is fully taxable. This is perhaps the greatest loophole in your child education plan when you use fixed deposits or recurring deposits.

Also, note that FDs only generate about 0.5% to 2% more than the average inflation rate for education costs (Source:Countryeconomy.com), and the latest fixed deposit rates available are 6.5% p.a. (Source: NDTV.Com/Business)

1. To achieve 80C tax benefit, you must invest only in the 5-year tax-saving FD

2. Recurring deposits will not give you 80C benefit, thus only lumpsum should be invested in the 5-year FD

3. Any FD for a lower or higher tenure is still taxable as there is no tax exemption

4. Also, the biggest draw-back is that the investment is not fool-proof. In case of the unfortunate death of the bread earner of the family, the investment stops.

Considering these drawbacks, you may want to ask, “Are there more tax-efficient but equally safe investment options available?”

Investing in products that are market-linked get you to return basis the performance of the stock markets. If the markets move in a positive direction, your investment gets high returns or vice versa.

Your money gets invested in the fund of your choice depending on your risk preference– Debt, equity or a mix of both. Equity helps your money grow in the long term so that the returns from your investment are able to beat inflation. Say you invest in Equity Linked Mutual funds, Child Insurance Plans, etc, the money invested is exempt from tax up to the 80C limit

1. The returns on your invested money are exempt from tax

For example, a 30-year old father buys a child plan of Rs 5 lakh sum assured for his 1-year old. If he pays an annual premium of Rs. 50,000 for 20 years, the maturity value of a child plan would be: