Invest for your children, get tax benefits

In today's world of ever increasing 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 Sec 80C within the Rs 100,000 limit.

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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 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.

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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 Sec 80C, up to Rs 100,000 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.

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Health insurance premium: When you take a health insurance for your child, you can claim the premium paid as a deduction from your income, upto 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.

Sec 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 atleast 40 per cent) and Rs 100,000 for severe disability (impairment of 80 per cent or above).

Sec 80DDB of the Act allows expenses incurred towards treatment of specified illnesses for children to be deducted from income, upto Rs 40,000.

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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 2 children.

However, these expenses need to be incurred in India.

The next is an education allowance, wherein Rs 100 per month per child upto a maximum of two children is exempted from income.

Here also, the expenses need to be incurred in India.

Medical expenses incurred for dependent children are allowed as a deduction upto 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.

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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 upto Rs 1500 as a deduction on this income.

This is available for up to two children.

For example, you can invest upto Rs 15,000 in a long term fixed deposit 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 interestamount will grow over the years, resulting in an increase in tax liability.

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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.

When you have children, you will be forced to incur various kinds of expenses on them.

A smart investor is one who knows how to get maximum benefit on the expenses incurred on his children, as well onthe investments made in their name.