1. Tax talk: When reducing tax liability is child’s play

Tax talk: When reducing tax liability is child’s play

THE government provides tax deductions on investments made and expenses incurred for children. Here are a few ways to reduce your tax liability.

By: | Updated: October 2, 2015 12:02 PM
tax

THE government provides tax deductions on investments made and expenses incurred for children.

THE government provides tax deductions on investments made and expenses incurred for children. Here are a few ways to reduce your tax liability.

Investments

Under Section 80C of I-T Act, investments made in the name of your children are entitled to tax deductions. If you have a girl child, it’s a good idea to invest in the Sukanya Samriddhi Account Scheme. The accrued interest on deposits in this account is exempt from tax. You can claim tax deduction by investing in National Savings Certificate (NSC) in the name of the minor child. Since the interest is reinvested in the NSC, the same effectively stands exempt from income tax. The principal amount received on maturity is exempt as well.

The amount deposited in Public Provident Fund (PPF) in the name of your children is allowed as a deduction and interest accrued thereon is exempt from tax. The principal amount received on maturity is also exempt. Premium paid in connection with life policy taken in the name of your children is allowed as a deduction from income (up to 10% of the sum assured). But if your child is suffering from a disability or a specified disease, deduction shall be allowed for 15% of the sum assured.

Expenses

Expenditure incurred on education and care of your children is also eligible for tax deduction. You can claim deduction for this expenditure provided the payment is made for full-time education in India and this deduction can be claimed for maximum two children. Also, amount spent on the medical treatment/training/rehabilitation of handicapped dependent children can be claimed as deduction up to R75,000 under Section 80DD. Deduction is also allowed under Section 80E for payment of interest for education loan for a continuous period of eight years starting from the year in which the interest was paid for the first time. Higher education includes any course pursued after senior secondary examination.

Income of minor child

It is clubbed with the income of mother or father, whosoever has higher income. But if any income is to be clubbed, exemption is allowed up to R1,500 per annum per minor child. However, income of a minor child who is suffering from a disability is not clubbed. Similarly, if the minor child earns income from natural talent/skill/expertise, such income is not clubbed. But if such income has been invested further, income arising from such investment is clubbed.

Forming a trust

You can also form a trust in the name of your minor child through an irrevocable transfer made to it. The income from investments made through this trust will not be clubbed in your income, though the trust has to pay tax on this income.

You can also save tax on allowances given by your employer, as a part of your salary. Children education allowance is exempt up to R100 per month per child up to a maximum of two children. Similarly, hostel allowance is exempt up to R300 per month per child up to a maximum of two children. Medical expenses of your children reimbursed by the employer are exempt from tax if the treatment is provided in a hospital owned by the government or the employer himself or a private hospital if it is approved by the government. However, if the treatment is provided in any other hospital, the amount is exempt up to R15,000 and any excess is considered salary income. While planning the best for your children, also plan how to save tax. Become a smart investor and save on your tax outgo.

Saving wards’ future

Under Section 80C of I-T Act, investments made in the name of your children are entitled to tax deductions.

If you have a girl child, it’s a good idea to invest in the Sukanya Samriddhi Account Scheme. The accrued interest on deposits in this account is exempt from tax.

You can claim tax deduction by investing in National Savings Certificate (NSC) in the name of the minor child.

Since the interest is reinvested in the NSC, the same effectively stands exempt from income tax. The principal amount received on maturity is exempt as well

(The writer is partner, Nangia & Co. Inputs from Neha Malhotra, Nangia & Co.)

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