Income tax benefits for children

All income tax rules are not known by everyone as same as Mr. Gupta. When he submitted the proof of his investment in his office, he was surprised when get informed that he also get rebate on school fees of his children. He also has the receipt of school fees. He now tries to invest more and more to his children name to get more benefits.

There are many investment with the child name of this the assessee can get the deduction. However, most of them come into Section 80C of income tax act which has the tax deduction limit of Rs.1 lakh. These deductions are as under.

Tuition fees paid
A parent can claim deduction on school fees paid to any school, university, college or any other educational institute. The limit of deduction is Rs. 1 lakh under section 80C with deduction of insurance, ppf and pension etc. however, this deduction only be claimed of 2 dependent children to an educational institute with in India.

Interest on educational loan
Expenses on higher studies are too costly now days. If any loan is taken for higher studies of children, the entire interest amount is fully deductible under section 80E of income tax act. This deduction is valid up to eight years from the year in which interest is actually paid. This deduction can be claimed either by the parent or the child.

Health insurance premium
In case of health insurance of children, parent can claim a maximum deduction of Rs.15000 paid towards premium of health policy on the name of children.

Certain diseases
Section 80DDB allows some specified diseases on which the parents or the child can avail maximum deduction of Rs. 40000 if dependent child suffers from one of the specified diseases.  Some ailments on which tax benefits are available are as under.

Neurological diseases ( like Dementia, Dystonia Musculorum Deformans, motor neutron disease, ataxia, chorea, hemiballismus, Aphasia, Parkinson’s Disease), cancer, full blown acquired immune deficiency syndrome ( AIDS), Chronic renal failure, hemophilia and thalssaemia.

In the case of disable dependent, the parent can claim maximum deduction of Rs. 50000 a year in case of 40% disability and maximum of Rs. 1 lakh a year in case of 80% disability under section 80U of income tax act.  This deduction is offered by income tax department as lump-sum and it’s doesn’t matter how the assessee may spend this amount.

For claiming this deduction, the assessee must obtain a certificate of medical authority as the forms and style prescribed in income tax act.

Hostel allowance
Hostel allowance is deductible under income tax up to a maximum of 300 Rs per month maximum of 2 children only in case of expenses incurred in India.

Educational allowance
Rs. 100 per child with maximum of 2 children is exempted only in case of expenses incurred in India.
 Medical expenses

Deduction of Rs. 15000 per annum is allowed as reimbursement as medical expenses. This deduction can be claimed by self as well as two dependent children. One needs to produce original medical bills to avail this deduction.

Free/ Concessional Educational
Facility: Deduction to an extent of ₹ 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.

Set a trust
One can save big taxes if set up a trust for children. In trust, the money cannot be claimed back by the donor. Any profits made through investment are the trust income and it cannot be clubbed on assessee income. Trust has its own purpose and it’s only liable to tax.

According to the gift rule in income tax in India, any gift received above RS. 50000 are taxed in the hands of recipient. This rule does not apply to relatives, occasion of marriage and under a will or inheritance. Gifts includes in cash or in kind.

However any income earned by assets gifted to the minor child is included in the income of donor for tax calculation purpose.

These are some points which one can keep in mind while making investment or preparing tax liability. However only the parent or the child can claim deduction and not both.
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About Nitin Aggarwal

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