07 May, 2013 08:34 PM

Tax benefits for the spending for your children

The expenses on you children - be it on education or health is one of your major income drains. And this is not avoidable. But many of these expenses can bring you income tax benefits. Most of these expenses fall under the Section 80 CHere are a few such cases that will help you reduce your tax outflow:

Interest on education loan: The spending on education is one of the major expenses towards your children. If you take an education loan, you can claim deduction under Section 80E of the Income Tax Act. You will get a tax benefit on the interest you pay and there is no limit to this amount. No deduction, however, is now available for the principal repayment.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. Do remember, repayments on your education loan are NOT covered under Section 80C. As mentioned above, they are covered under Section 80E of the Income Tax Act.

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, up to Rs.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 health insurance for your child, you can claim the premium paid as a deduction Study

from your income, up to a Rs. 15,000 in a year.

Expenses on treatment of disabilities and certain ailments:The Income Tax Act allows the parent to claim a deduction from his income an amount incurred towards treatment of specific disabilities and illnesses of his child under two sections. Section 80DD of the Act 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 Rs. 50,000 for a normal disability (impairment of at least 40 per cent) and Rs. 1 lakh for severe disability (impairment of 80 per cent or above). Section 80DDB of the Act allows expenses incurred towards treatment of specified illnesses for 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 two children. However, these expenses need to be incurred in India. The next is an education allowance, wherein Rs100 per month per child up to a maximum of two children is exempted from income. Here, too, the expenses need to be incurred in India. Medical expenses incurred for dependent children are allowed as a deduction of up to Rs. 15,000 per year on furnishing of medical bills. Most of these upper limits are those which have been set several years ago, and 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. 1,500 as a deduction on this income. This is available for up to two children. For example, you can invest up to Rs.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 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 lesser if the income is clubbed with your income.