What is a Child Education Plan?
Child education plans are schemes that provide returns that you can use for the purpose of your child’s educational expenses. As higher education is a predictable stage, you can start investing in such plans well in advance. And due to the long duration between when your child is still young till when they reach higher education age, these plans became long-term plans by default.
The interest rates for long-term plans are usually more than 7 or 8 %, and for long-term child education plans, they are around 10 to 12%. This can increase much more if you choose an investment scheme instead of a savings scheme. Any interest rate above 7% can easily beat the projected inflation rates of India. So, you don’t need to worry about the depreciation of money over long durations.
What child education plans offer are plenty of relaxations as they are for the benefit of children, while several of these are from the government to promote child education. Besides high returns and relaxations, they also have benefits during different important stages of a child’s life. These are in addition to the maturity returns, which are receivable only at the term end of the scheme. Some common stages where children are eligible to receive benefits are when they require expensive coaching in higher grades, college education, professional & technical courses, relocation, or when they turn 18. Usually, parents invest in these schemes in such a way that the maturity date aligns with the time the child is around 16 years.
Different Types of Savings and Investment Plans for Children’s Education
While a child education plan can solely mean an insurance policy, people use several other plans as their child plans. They are schemes that provide such high returns even if they are not meant explicitly for children. Therefore, what they do is invest in these schemes while keeping the child as their nominee. So even if they are not around, they can rest assured knowing that the scheme’s benefits will go in their child’s hands.
Savings plans have a limited return as compared to investment plans. And if the investment plans are market-dependent, then there is no limit to the return they can yield. Given below are some of the popular schemes that people use as a child education plan.
Employees’ Provident Fund (EPF)/Public Provident Fund (PPF)
Employees’ Provident Fund and Public Provident Fund are both government schemes that are for salaried employees. While EPF is mandatory for big companies, PPF is voluntary and accessible to everyone. You can open these accounts in your name, and every adult can have only one account. According to annual government updates, the interest rates change, but they usually are around 8%. As of F.Y.2021-2022, the interest rate of EPF is 8.5%, and that of PPF is 7.10%.
Indians give more preference to deposit schemes than any other scheme due to their robust reliability. There are mainly two types of deposit schemes: fixed deposits and recurring deposits. You have to make a single-time investment a huge sum in a fixed deposit and get the benefits at the end of the term. And in recurring deposits, you have to make regular payments mostly every month. Both these schemes are good options for child education plans no matter which you choose, as the benefits are almost similar in the long run.
Post Office Savings Schemes
Post office savings schemes are similar to recurring deposits. But an advantage is that you can invest as low as INR 500 per year. They help enable even low-income households to invest in a child education plan.
Gold and Precious Metals
Precious metals tend to increase in value over time and gain value with long-term retention. Gold is the precious staple metal for Indians. In India, mostly everyone invests in gold for several needs. However, several advisors recommend investing in gold sovereign bonds as a substitute for real gold due to the handling risks involved.
Stocks and Bonds
Investing in stocks and bonds is extremely profitable as well as risky. These securities have the potential to multiply your invested capital numerous times. But if market conditions worsen, you can even incur losses on your investment. So, you must only invest in these after thorough research and with utmost caution.
You can even rely on your business ventures to finance your child’s education. If run successfully, these can produce profits to meet not only your child’s education expenses but for the whole family’s expenses.
Apart from personal schemes, the government also has direct schemes from which you can benefit. These schemes opened under the child’s name can have very low or even zero investment. They come in the form of government aid, refunds, supports, or discounts. Most of these schemes are only for girls to encourage girl child development.
Why do You Need a Child Education Plan?
It is evident from all the benefits and features of a child education plan how essential it is in providing good education to your child. The main goal of such a plan is to accumulate means to provide the best education to your child. But these plans also have personal benefits for you as an individual who is investing money. The following are some of the benefits you can gain from a child education plan.
Guaranteed Return of Capital and Interest
While several high return investments like gold, assets, stocks cannot guarantee the invested capital, child education plans can. It is one of the best features that attract several parents into investing in such plans. Apart from this, you also get a guaranteed return on investment or interest. Plans specify the interest rates in the terms and conditions for the investor’s knowledge. So, no matter what, you will get the invested capital and this specified interest at maturity.
Some dynamical and market-dependent plans have interest rates that reflect current market conditions at maturity. A good example is a ULIP plan. In these schemes, you will assuredly get the interest rate mentioned in the T&C, and it will not go down even in bad market conditions. But you can get an interest rate higher than the one mentioned earlier if the market conditions are good. This you will give you increased maturity benefits.
Income Tax Deductions on Premium Payments
As mentioned earlier, the government has several relaxations to promote child education. One of the relaxations is income tax benefits on premium payments. You can claim up to INR 1,50,000 deduction in your taxable income per year. This will help you save money spent as income tax and divert it towards your child’s education.
Another relaxation of a child education insurance plan is that the maturity lump sum you get is tax-free under Section 10 (10D) of the Income Tax Act of 1961. It is as long as the annual premium is less than 10% of the assured sum. This relaxation is not applicable only for the invested capital return and not for the interest. Some child plans also have tax-free interests, but they are mostly high-risk investments. However, tax laws are subject to change from time to time.
Life and Health Cover
Another benefit you can get from a child education plan is life and health cover. You can purchase a plan as a life insurance policy in your name and keep your child as a nominee. Or you can purchase the policy in your child’s name, and in case of loss of life of the financially contributing parent(s), the insurance company will waiver further premium payments. In such a scenario, the child will get the plan’s gains accumulated until then.
Most child education plans have the provision of withdrawal in an emergency. Emergency withdrawal will help you tackle any unexpected financial requirements in your family. You can only withdraw a limited portion of the accumulated capital based on the regulations of the plan provider. And if you don’t have enough funds to withdraw, major banks offer loans against the maturity amount of your plan. These withdrawals and loans against policies have low-interest rates.
Sometimes, children will not require the funds from the child education plan. It is because they get scholarships or the current financial background of the family is good enough to support education expenses. You can set aside the returns as backup funds for your child in such cases. They can use this money in the other important life stages which require high financing.
A child education plan is a tool that will make your child self-dependable. They won’t have to rely on other sources to meet their educational expenses. Such independence boosts confidence and personality development in children. They understand the value of money and the ones who provide them with this money. But more importantly, these plans provide you with peace of mind. Enabling you to focus on other important matters without constantly worrying about your child’s education.