Spend For Your Kids, Get Tax Benefits!

By | May 9, 2016

Spend for kids get tax benefits

In today’s world of ever increasing expenses, spending on your children results in a substantial outflow from your pocket. However, did you know that you can get tax benefits on many expenses and investments made in your child’s name? This includes a wide variety of expense heads and investments. Most of these investments fall under the ambit of Section 80C of the Incom Tax Act within the Rs. 1.5 lakh limit. Here are a few such cases, which will help you reduce your tax outflow:

Interest on Education Loan: The cost of education for your child is a huge outflow and needs to be well planned. Most people opt to take a loan to fund their child’s higher studies. While this results in a repayment burden, you can gain partially as the interest portion on an education loan is fully tax deductible under Section 80E of the Income Tax Act. This loan can be taken by the borrower, parent or spouse of the student from a recognized financial institution. The loan must be taken for a full-time course, as approved by the financial institutional. Today, loans are available for vocational, non-vocational and professional courses.

Payment of tuition fees: Tuition fees paid by the parent to fund his or her child’s education in any school, university, college or any other education institution within India, can be claimed as a deduction under Section 80C, up to Rs. 1.5 lakh in a year. The amount of the deduction is restricted to two dependent children and should pertain only to the actual tuition fees paid. However, both husband and wife have a separate limit of two children. So, each parent can claim for two children each. But note that part-time courses and coaching classes are not covered.

Health insurance premium: When you take health insurance for yourself, your spouse or dependent children, you can claim the premium paid as a deduction from your income, up to Rs. 25,000 a year.

Expenses on treatment of disabilities and certain ailments: The Income Tax Act allows the parent to claim a deduction from his income for an expense incurred towards treatment of specific disabilities and illnesses of a dependent relative under two sections. Section 80DD of the Act states that expenses incurred towards medical treatment of dependent relatives, suffering from a disability, are eligible for a deduction. The limit of deduction under this section is Rs. 75,000 for a normal disability (impairment of at least 40%) and Rs. 1.25 lakh for severe disability (impairment of 80% or above). Section 80DDB of the Act allows expenses incurred towards treatment of specified illnesses for self or dependent relatives, including children, to be deducted from income, up to Rs. 40,000.

Deduction of allowances: There are a host of allowances specified in the Income Tax Act, which are allowed by an employer as a deduction from the income of the employee. The first is a hostel allowance of Rs. 300 per month per child, up to a maximum of 2 children. However, these expenses need to be incurred in India. The next is an education allowance, where Rs.100 per month per child, up to a maximum of two children, is exempted from income. Here also, the expenses need to be incurred in India. Medical expenses incurred for dependent children are allowed as a deduction, up to Rs. 15000 per year, on furnishing of medical bills. Most of these upper limits were set several years ago and so, seem like an insignificant amount today on the back of growing inflation. Several representations have been made to the Government to increase the exemption limits of these allowances.

Minor child’s income: When you make investments in your child’s name, the income earned from these investments will be clubbed with your income. However, if you have invested anywhere in your minor child’s name and this investment generates an income, you can claim up to Rs. 1500 as a deduction on this income. This is available for up to two children. For example, you can invest up to Rs. 15000 in a long term FD, which gives an annual return of 10%, and be exempt from tax. Remember that if the interest is on a compounding basis, the interest amount will grow over the years, resulting in an increase in tax liability.

Formation of a trust: You can set up a trust in your minor child’s name to save on tax. You will need to make an irrevocable transfer to the trust so that the money will not be claimed by you. When you make investments through this trust, the income made through these investments will not be clubbed with your income. Even though the trust has to pay tax on this income, the total tax liability will be lower than if the income was clubbed with your income.

When you have children, you will be forced to incur various kinds of expenses. A smart individual is one who knows how to get the maximum benefit from these expenses, as well as from the investments made in their children’s name.

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