If you invest for your child, any income that is earned from this investment will be clubbed with your income and you will have to pay tax on it. But, if the investment is made methodically, then better planning can be done.

Further, if the income is deferred and not received during the minority period of the child, then such income is not to be clubbed. Thus it is wise to invest money in flats, building or plot of land, purchase jewellery, ornaments or silver utensils, Deposit the money in PPF, invest in tax-free securities and bonds, invest in shares and investment, wherefrom the income is deferred, beyond the minority of the child
Further, the Supreme Court had pronounced that on the attainment of majority by the minor, the accumulated fund cannot be included in the income of the parent, since on the date of receipt; the receipt is no longer a minor. However, the accumulated income will be chargeable to tax on its receipt in the hands of child, who will become major at the time of receiving the amount.

The crux is that the provisions of clubbing can only apply in a case where the child is a minor at the time of receiving or enjoying any benefit out of transferred property.

So, the trick is to avoid investing in a short-term fixed deposit as it is not tax-efficient. A better option is to put the money in assets where the income is received by the child after he becomes an adult. These include 10-year cash certificates and zero-coupon bonds.

However, if you have already made short-term investments, you can still benefit as the child’s short-term capital gain or loss can be offset against your short-term capital gain or loss.

Your child can have a Public Provident Fund (PPF) account even if he is less than 18 years old. So, to reduce your taxable income, you can invest up to Rs 70,000 in your child’s name.

However, this is the maximum limit that you can contribute to the PPF, whether it’s in your name or your child’s. This can actually be detrimental for you because you should use the PPF to build a retirement corpus for yourself.

If your child earns money, it will be considered his income and he will have to pay tax on it. This money will not be clubbed with your income. He could earn it by working manually or by using his skill, experience, talent or specialised knowledge, such as selling a painting or working in an advertisement.

If your child’s income is clubbed with yours, you can avail of an annual exemption of Rs 1,500. This provision is available for up to two children. So, you could consider investing Rs 15,000 in a long-term FD that earns 10% interest every year. However, keep in mind, that the interest will be calculated on a compounding basis, which means that the money in the FD will increase over the years and you may have to pay tax on it.
You can avail of a tax benefit if you buy a life or medical insurance cover for your child. While buying life insurance for a child may not make much sense, you could take a health plan to cover against illnesses.

The premium that you pay for the plan is eligible for deduction under Section 80C, along with your other investments.

A monetary gift received from specified relatives, such as parents and grandparents, is exempt from tax. A sum of over Rs 50,000 from other relatives will be taxable.

However, if your child receives money through inheritance or as an award from an educational institution or a foundation, he will not have to pay tax on it.