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Tax benefits for children? Here are a few tips!

Last updated on: March 30, 2013 09:29 IST

Tax benefits for children? Here are a few tips!

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Anil Rego in Mumbai

When Shashank Pal, an engineer with a leading construction firm submitted proof of his tax saving investments in his office, he was in for a pleasant surprise.

He was informed that he can get tax exemption for the school fees paid for his child.

He also managed to locate the fee receipts at home and submitted them in time so as to claim tax exemption this year.

Now he has decided that, henceforth, he will be regular and will not miss out on any of the chances to invest in his son's name, which will also help him get tax breaks.
Let us look at some of the deductions we can claim for investments made in children's names.

Most of these deductions fall within the investment limit of Rs 100,000 under Section 80C.

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Tuition Fees Paid:

In respect of school fees a parent can claim a deduction of tuition fee paid to any university, college, school or any other educational institution.

The deduction on payments made towards tuition fee can be claimed up to Rs 100,000 together with deduction in respect of insurance, provident fund and pension.

It can only be claimed in respect of two dependent children and for fees to an educational institution within India and for tuition fee only.

Interest on Education Loan: The cost of higher education is often a burden on the family's budget and parents are forced to borrow for their children's education.

The interest paid (not the principal amount) on an education loan is fully deductible from taxable income under Section 80E up to eight continuous years, starting from the year in which the interest is first paid.

This can be claimed by either the child (if the loan is in their name) or by the parent.

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Premium paid for health insurance: Parents can claim a deduction up to a limit of Rs 15,000 on premium paid towards health insurance policies taken for their children.

Tax benefits for certain ailments: The treatment of a chronic illness can be a drain on the finances of a family.

This is why the Income Tax Act allows a deduction of Rs 40,000 if one has a dependent child who suffers from any of the ailments specified under Section 80DDB, provided the child does not separately claim any deduction towards the same ailment.

Aliments for which tax breaks are available are few: Neurological diseases (like Dementia, Dystonia Musculorum Deformans, motor neutron disease, ataxia, chorea, hemiballismus, Aphasia, Parkinson's Disease), cancer, full blown acquired immune deficiency syndrome, Chronic renal failure, hemophilia and thalassaemia.

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Disabilities also eligible for deduction: If one has a disabled dependent, one is eligible to claim Rs 50,000.

The deduction is available only if the impairment is at least 40 per cent and if the disability is severe (80 per cent or above), the deduction is Rs 100,000 a year.

Incidentally, the deduction is offered as a lump sum and is irrespective of the actual amount that the taxpayer may spend.
To claim this deduction, under Section 80U one must furnish a copy of the certificate issued by the medical authority in the form and manner, as may be prescribed.

Medical Authorities means any hospital or institution specified in Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995. Such Medical Authorities are prescribed from time to time by Government Authorities.

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Hostel Allowance: Rs 300 per month per child up to a maximum of two children is exempted (only if expenses are incurred in India)

Education Allowance:  Rs 100 per month per child up to a maximum of two children is exempted (only if expenses are incurred in India)

Medical Expenses Reimbursement: Deduction of up to Rs 15,000 per annum is allowed. This can be claimed for self as well as for children who are dependent. Medical bills have to be furnished to avail this benefit.

Free/Concessional Educational Facility: Deduction to an extent of Rs 1,000 per month is allowed provided the educational institution is maintained and owned by the employer or any other educational institution by reason of his being in employment of that employer.

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Setting up a Trust: One can save taxes by creating a trust for children.

One needs to make an irrevocable transfer to the trust, where money cannot be claimed back by the donor.

All investments are made through the trust and the income generated can only be used in accordance with the purpose of the trust.

The income from the investments is not clubbed with the donor's income, but the trust needs to pay tax. This method helps reduce the tax liability.

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Gifts: Any gift received in cash or kind exceeding Rs 50,000 is taxed in the hands of the recipient.

However, this rule does not apply to gifts received from relatives and received on the occasion of one's marriage or under a will or inheritance.

Any transfer of money or of movable or immovable assets, is considered as a gift. Though there is no tax on gifts, all gifts in excess of Rs 50,000 (other than those from relatives) and income generated through them get clubbed with the recipient's taxable income.

However, income earned by assets gifted to minor children are included in the income of the donor for taxation.

If you want the money earned to be treated as independent income of your minor children you will have to prove that the recipients had used their own acumen for making money from the gifted assets.

By utilising these tax breaks given by the income tax department, it is possible to further reduce one's tax burden.

However, only one parent can claim these benefits -- not both.

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Summary:

  • One can deduct their children's education expenses, and medical bills against their taxes
  • A dependent child's income will be clubbed with yours unless it can be proved that the child has earned the money in his or her own right
  • Setting up a trust for your children is a tax efficient method of investing on their behalf
  • Only one parent can claim deductions for the children, not both

The writer is CEO & Founder, Right Horizons



Image: Children in a school in Bihar.
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