SPENDING ON KIDS CAN SAVE YOU TAX

In today’s world of everincreasing 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 within the `1 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 of you may opt to take a loan to fund your child’s higher studies. While this results in a repayment burden, you can gain partially, as the interest portion on the 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 recognised financial institution.

The loan must be taken for a full-time course, which can either be a graduate course in engineering, medicine or management or post graduate course in engineering, medicine, management, applied sciences or pure sciences including mathematics and statistics.

PAYMENT OF TUITION FEES

Tuition fees paid by the parent to fund his child’s education in any school, university, college or any other education institution within India can be deducted under Section 80C, upto `1 lakh in a year. The amount of deduction is restricted to two dependent children and should pertain only to 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.

HEALTH INSURANCE

PREMIUM

When you take a health insurance for your child, you can claim the premium paid as a deduction from your income, up to a `15,000 in a year.

Expenses on treatment:

The I-T Act allows the par- ent to claim deduction from his income tax, the amount incurred towards the treatment of certain disabilities and illnesses of his child under two sections. Section 80DD states that expenses incurred towards medical treatment of dependent children suffering from a disability are eligible for deduction. The limit of deduction under this section is `50,000 for a normal disability (impairment of 40 per cent) and `1 lakh for severe disability (impairment of 80 per cent or above). Section 80DDB allows expenses incurred towards treatment of specified illnesses for children to be deducted from income, up to `40,000.

DEDUCTION OF ALLOWANCES

There are many allowances specified in the I-T Act, which are provided by an employer. You could claim them as a deduction from your income, if you had actually incurred those expenses in India.

The first is a hostel allowance of `300 per month per child, up to a maximum of two children. The next is an education allowance, wherein `100 per month per child up to a maximum of two children is exempted from income.

Medical expenses incurred for dependent children are allowed as a deduction up to `15,000 per year upon furnishing of medical bills.

Most of these upper lim- its are those which have been set several years ago, and seem like an insignificant amount today, on the back of growing inflation.

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 `1,500 as a deduction on this income. This is available for up to two children. For example, you can invest upto `15,000 in a long-term FD which gives an annual return of 10 per cent, 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 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 lesser if the income is not clubbed with your income.

When you have children, you will be forced to incur various expenses on them. A smart investor is one who knows how to get maximum benefit on the expenses incurred on his children, as well on the investments made in their name. Adhil Shetty is CEO of

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