Income Tax Exemption for children School fees, education loan and health costs

In respect of school fees a parent can claim a deduction of tuition fee paid to any university, college, school or any other educational institution. The deduction on payments made towards tuition fee can be claimed up to Rs 1 lakh together with deduction in respect of insurance, provident fund and pension. It can only be claimed in respect of two dependent children and for fees to an educational institution within India and for tuition fee only.

The interest paid (not the principal amount) on an education loan is fully deductible from taxable income under Section 80E up to eight continuous years, starting from the year in which the interest is first paid. This can be claimed by either the child (if the loan is in their name) or by the parent.

Parents can claim a deduction up to a limit of Rs 15,000 on premium paid towards health insurance policies taken for their children.

The treatment of a chronic illness can be a drain on the finances of a family. This is why the Income Tax Act allows a deduction of Rs 40,000 if one has a dependent child who suffers from any of the ailments specified under Section 80DDB, provided the child does not separately claim any deduction towards the same ailment.

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.

If one has a disabled dependent, one is eligible to claim Rs 50,000. The deduction is available only if the impairment is at least 40 per cent and if the disability is severe (80 per cent or above), the deduction is Rs 1 lakh a year. Incidentally, the deduction is offered as a lump sum and is irrespective of the actual amount that the taxpayer may spend.

To claim this deduction, under Section 80U one must furnish a copy of the certificate issued by the medical authority in the form and manner, as may be prescribed. Medical Authorities means any hospital or institution specified in Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995. Such Medical Authorities are prescribed from time to time by Government Authorities.

Hostel Allowance Rs 300 per month per child up to a maximum of two children is exempted (only if expenses are incurred in India)

Education Allowance Rs 100 per month per child up to a maximum of two children is exempted (only if expenses are incurred in India)

Medical Expenses Reimbursement Deduction of up to Rs 15,000 per annum is allowed. This can be claimed for self as well as for children who are dependent. Medical bills have to be furnished to avail this benefit.

Deduction to an extent of Rs 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.  

One can save taxes by creating a trust for children. One needs to make an irrevocable transfer to the trust, where money cannot be claimed back by the donor. All investments are made through the trust and the income generated can only be used in accordance with the purpose of the trust. The income from the investments is not clubbed with the donor’s income, but the trust needs to pay tax. This method helps reduce the tax liability.

Any gift received in cash or kind exceeding Rs 50,000 is taxed in the hands of the recipient. However, this rule does not apply to gifts received from relatives and received on the occasion of one’s marriage or under a will or inheritance. Any transfer of money or of movable or immovable assets, is considered as a gift. Though there is no tax on gifts, all gifts in excess of Rs 50,000 (other than those from relatives) and income generated through them get clubbed with the recipient’s taxable income. However, income earned by assets gifted to minor children are included in the income of the donor for taxation. If you want the money earned to be treated as independent income of your minor children you will have to prove that the recipients had used their own acumen for making money from the gifted assets.

By utilising these tax breaks given by the income tax department, it is possible to further reduce one’s tax burden. However, only one parent can claim these benefits – not both.

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See also: 

Income Tax Provision in Union Budget for 2013-2014 [click here] 2012-2013 [click here] 

Deduction of Tax at Source – Salary: For Financial Year 2012-13 – ITD Circular No. 8/2012