If you have children, undertaking the following steps makes you eligible for attractive tax rebates and discounts:
Opening a Bank account for your Children
You can avail up to Rs.1500 as a tax discount on the interest your child acquires from his/her savings account balance, as per Section 10 (32).
This Rs.1500 benefit is available on any income or earning in your kid’s name and not on bank account interest alone.
Keep in mind that this is the upper limit for one child. Thus, if you three children with bank accounts, the combined tax savings would be,
1500 x 3 = Rs.4500.
Saving Taxes on Education Loan Interest Payment
Section 80E has a provision for parents to save taxes based on the yearly interest payment on their child’s education loan.
For instance, if your taxable income is Rs.4 lakh (after considering all applicable deductions) and the interest payment for your child’s education loan amounts to Rs.1 lakh in that year.
Your actual taxable income = Rs.4 lakh – Rs.1 lakh = Rs.3 lakh.
Keep in mind that this provision can extend up to 8 years from the year when interest payment on education loan begins.
Dependent Child with Serious Disease or Disability
According to Section 80DDB, you can claim a deduction of up to Rs.40000 based on expenses related to treating severe diseases in your children.
If your kid suffers from disabilities, you are eligible for a maximum deduction of up to Rs.75000 a year on income taxes.
For example, if a person’s taxable income after all other deductions is Rs.5 lakh. His actual taxable income would be reduced to the following amounts in case of disease or disability of children.
In case of disability, taxable income = Rs.5 lakh – Rs.75000 = Rs.425000
In case of diseases, taxable income = Rs.5 lakh – Rs.40000 = Rs.460000
Investing in the names of Independent Children
Kids over 18 years are considered independent of their parents, even though most such individuals do not begin earning at such an early age.
At such a time, parents can gift their child money to invest in tax-free investment schemes. Returns from such instruments are considered as income for your kid and not your own.
For instance, a father gifts his 18-year son Rs.50000 to invest in mutual funds. At the end of a year, he claims Rs.55000 from this instrument.
If you acquired an interest of Rs.5000, you would have to bear taxes on the same. However, since this income is in your adult son’s name, no taxes are applicable.
Acquire Health Insurance for Children
If you are currently bearing health insurance premiums for a medical insurance plan covering your children, you are eligible for tax benefits of up to Rs.1.5 lakh under Section 80C.
Moreover, under Section 10, you can claim an additional Rs.9600 as a rebate on your taxable income if you have two or more children.
Consider your taxable income is Rs.2 lakh. You pay premiums worth Rs.20000 for your kid’s health insurance policy. In that case, your total tax liability would be
Actual taxable income = Rs.2 lakh – (20000 + 9600) = Rs.170400
Tax saving from Tuition Fee, Hostel Expenses and Education Allowances
You can also take advantage of tax-saving opportunities on your children’s tuition fees under Section 80C if you are still to hit the Rs.1.5 lakh upper limit on this provision.
Besides this, you can claim Rs.300 as education allowance each month for up to two children (300 x 12 x 2 = Rs.7200).
Lastly, tax benefit on hostel fees amounts to Rs.100 per child per month for a maximum of two children (100 x 12 x 2 = Rs.2400). These last are provisions under Section 10.
Saving Taxes by Investing in Mutual Funds, PPF and ULIPs in your Child’s Name
If you invest on your child’s behalf in PPF, mutual funds and other instruments, you are eligible to club the returns from these with your tax benefits under Section 80C.
If the income exceeds the Rs.1.5 lakh rebate, the additional earnings would be taxed normally.
You can instead choose to invest such sums into tax-free schemes, such as PPF.
Returns from such devices cannot be taxed, thereby ensuring significant exemptions beyond just Section 80C.
Consider an example where Mr Verma has a taxable income of Rs.1 lakh. His underage son has income from two distinct instruments, namely PPF and mutual fund. The former earns him Rs.5000, while the mutual funds net a return of Rs.20000.
The PPF earning is tax-free, while the mutual fund earnings will be deducted from taxable income as per Section 80C. Therefore,
Actual taxable income = Rs.1 lakh – Rs.20000 = Rs.80000