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How can Your Child Provide Relief from Tax

One of the biggest headaches every working professional goes through every year is saving income tax. With time, having children and all the expenditures behind their education and future etc. makes a further dent in a middle-class professional's annual gross income. However, the Indian Government allows people to save tax legitimately in several ways based on the Income Tax Act of 1961. It includes many ways for tax exemptions on the expenditures on their child’s education, health, and wellbeing.

Exemptions on Tuition Fees:

While the government of India is particular about improving the country's overall literacy rate, it allows income tax exemptions for parents on the tuition fees paid for their child’s education in any of the registered schools, colleges, universities, or educational institutions across the country. For working professionals, the tuition fee allowance for their children can be in the salary structure.  

The education must be a full-time course for parents to be eligible for applying for the exemption. This exemption can be applied under Section 80C of the Income Tax Act for a maximum of 2 children and has to be within the overall 80C exemption limit of Rs 1.5 Lakh/ year.

Exemptions on Education loan:

While there has been a significant rise in the cost of higher education in the country, a majority of Indian parents opt for various education loans to accommodate their children’s higher studies. However, they can still get some relaxations on tax from the interest amount paid on the education loan under Section 80E.

The exemption can go up to 8 years starting from the year the first repayment has been made. The education loan has to be taken from a government-approved bank or institution to avail of this offer.

Exemptions on Hostel and Education Allowances:

Based on the Income Tax rule, there are various ways the allowances can provide a complete income tax exemption, as mentioned in rule 2BB of Section 10(14)(ii) in the Income Tax Act. Allowances for children’s hostel and education are one of them. A parent can apply to Rs 300/ month or 3600/ annum as part of the children's hostel allowance for a maximum of 2 children. They are also allowed for another exemption of Rs 100/ month or 1200/ annum as their children’s educational allowance.

Exemptions on Medical Insurance Premium:

A parent can also claim for tax exemption for the health insurance premium he/she pays for himself/ herself, spouse, and children, and this amount can be up to Rs 25,000 per annum under Section 80D of the Indian Income Tax Act.

Exemptions on Medical Expenses:

Under section 80DDB, a parent can get exemption up to Rs 40,000 per annum on different expenses incurred on medical. The list of diseases for which exemptions can be requested on treatments is mentioned in Rule- 11DD of the IT rules.  Medical expenses on any disease that is not a part of the list cannot be claimed for exemption. Based on the present rule, the list of the diseases for which you can apply for exemptions are: 

  • Malignant Cancer
  • AIDS
  • Chronic Renal Failure
  • Haematological disorders such as Haemophilia and Thalassemia

Some neurological diseases are a part of the list such as:

  • Dementia
  • Ataxia
  • Parkinson’s disease
  • Motor neuron disease
  • Aphasia
  • Chorea
  • Hemiballismus
  • Dystonia Musculorum Deformans

Exemptions on the Treatment of a Child's Disability and Ailments:

Caring for children with special needs, which require a lot of care, attention, and medical attention can be emotionally and financially very overwhelming. For parents who have differently-abled children with a huge amount of expenditure on medical treatments of their children can get tax benefits under 80DD of the Income Tax Act.

The 80DD deals explicitly with tax benefits on medical expenditures on the treatment of a differently-abled dependent of the payer. If the applicant belongs to a Hindu Undivided Family, the dependent can be any member of the family. The amount of exemption also depends on the degree of disability of the child. 

According to Section 2(i) in Persons of Disabilities Act, for a parent to apply for a tax exemption under 80DD, the dependent must be suffering from any of the below-mentioned disabilities:

  • Blindness
  • Low Vision
  • Leprosy – cured
  • Mental Retardation
  • Hearing Impairment
  • Autism
  • Cerebral Palsy
  • Mental illness
  • Loco Motor Disability 

If the child's disability falls within 40 to 80%, which is termed as normal disability, a tax exemption of Rs 75000/ annum is allowed for the parent. In case the child's disability is beyond 80%, which is considered a severe disability, a tax exemption up to Rs 1.25 Lakh the parent can claim. The parent has to submit the certificate of disability to get the exemption.

Minor Child’s Income:

If a parent makes investments on his/ her child's name, the income from it will be added to the parent's income, and there would be no exemptions on a parent's earnings based on the amount invested. However, the parent can still claim an exemption up to Rs 1500 on the income from those investments such as bank account savings, fixed deposits, etc. on his/her minor child's name.

 In case the parents are divorced, the parent with the child's custody can apply for the exemption. This exemption can be applied for a maximum of two children. For example, if the parent opens an FD account on his/ her child's name, he can apply for an exemption on the annual return.

Formation of Trust:

Parents can also save tax by setting up a trust in his/her minor child’s name where they have to make irreversible investments to the trust that can’t be claimed by them. The income grossed through the trust won't be added to the parent's income, and the trust will be paying its tax. So the overall tax liability will be lesser when the income from the trust is added to the parent's income. 

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Written By: Paisawiki - Updated: 03 December 2020