Income tax exemption: 7 must-know advantages a child provides

Written by Rakesh Nangia | Updated: Jan 21 2014, 18:42pm hrs
Education loanInterest on education loan: As education has become very expensive, it is essential to plan it out. Reuters
Despite rising expenses, we ensure that we give the best to our Children. Did you know that you can avail of income tax exemption (benefits) on many expenses and investments made in your childs name

Interest on education loan: As education has become very expensive, it is essential to plan it out. Most of us may opt to take a loan to fund our child's higher studies. While this results in a repayment burden, one can gain partially, as the interest portion on education loan is fully tax deductible under Section 80E. The loan must be taken for a full-time graduate course.

Payment of tuition fees: Most schools, colleges and universities in India have some fixed amount as tuition fee. The same can be deducted under Section 80C, up to R1 lakh in a year. The amount of deduction is restricted to two dependent children and should pertain only to the actual tuition fee paid. However, both the husband and wife have a separate limit of two children. So, each parent can claim the benefit for up to for two children each.

Health insurance premium: When we take health insurance for our children, the premium paid can be claimed as a deduction, up to R15,000 in a year under Section 80D.

Expenses on treatment of disabilities and certain ailments: A parent can claim deduction from his income for the amount incurred towards treatment of specific 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 R50,000 for a normal disability (impairment of at least 40%) and R1 lakh for severe disability (impairment of 80% or above). Section 80DDB allows expenses incurred towards treatment of specified illnesses for children to be deducted from income, up to R40,000.

Deduction of allowances: The tax law specifies a host of allowances paid for expenses incurred on children, which are allowed by an employer as a deduction from the income of the employee. The first is a hostel allowance of R300 per month per child, up to a maximum of two children. The next is an education allowance, wherein R100 per month per child up to a maximum of two children is exempted from income. However, these expenses need to be incurred in India. Medical expenses incurred for dependent children are allowed as a deduction of up to R15,000 per year on furnishing of medical bills.

Minor childs income: When we make investments in our child's name, the income earned from these investments will be clubbed with our income. However, if we invest anywhere in a minor child's name and this investment generates an income, we can claim up to R1,500 as a deduction on this income. This is available for up to two children. For example, we can invest up to R15,000 in a long-term fixed deposits which gives an annual return of 10%, and be exempt from tax.

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

* The writer is managing partner, Nangia & Co. With inputs from Neha Malhotra