Are you a Parent? Important Tax Benefits You Should Know on this Universal Children’s Day

Parenting comes with both joy and more responsibilities including financial planning to secure a bright future for your child. In this Universal Children’s Day, to reduce your burdens, we’ve detailed the various Income Tax benefits that allow parents to save taxes and plan for their children’s education, healthcare, and investments. Let’s learn more about it

Tax Deductions and Credits for Parents

Children’s Education and Hostel Allowance (Section 10 of Income tax act)

Parents can claim specific exemptions under Section 10 of the Income Tax Act:

• Education Allowance: Rs. 100 per month per child, limited to 2 children.
• Hostel Expenditure Allowance: Rs. 300 per month per child, limited to 2 children.

These exemptions can help to claim education-related expenses though the amounts are small.

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Children’s Savings Accounts (Section 10(32) of Income tax act)

Income earned in a child’s name is taxable but parents can avail of a tax rebate under Section 10(32):

• Exemption of up to Rs. 1,500 per child annually on income such as bank account interest or other earnings.
• If you have three children, the combined exemption can amount to Rs. 4,500 (Rs. 1,500 x 3).

Education Loan Interest Deduction (Section 80E of Income tax act)

• Parents can claim a tax deduction on the interest paid for an education loan taken for their child’s higher education.
• This deduction has no upper limit on the amount of interest and is available for up to 8 years from the start of repayment.
• Example: If your taxable income is Rs. 4,00,000 and you pay Rs. 1,00,000 as education loan interest, your taxable income reduces to Rs. 3,00,000.

Health Insurance Premiums (Section 80D of Income tax act)

• Parents paying health insurance premiums for their children can claim deductions of up to Rs. 25,000.

Premium Waiver for Child Insurance Plans

Many child insurance plans include a premium waiver benefit, which ensures that in case of the policyholder’s demise, the policy continues without premium payments. This feature provides tax-free benefits under Section 10(10D).

Deductions for Disabilities and Serious Diseases

Section 80U of income tax act (Disabilities of Income tax act):

• Rs. 75,000 for children with disabilities.
• Rs. 1,25,000 for severe disabilities.

Section 80DDB of income tax act (Serious Diseases):

• Up to Rs. 40,000 for medical expenses related to specific severe diseases.

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Education-Related Tax Benefits

Tuition Fees Deduction (Section 80C)

• Parents can claim a deduction on tuition fees paid for up to 2 children, capped at Rs.1.5 lakh per financial year.
• The deduction applies only to full-time courses in schools, colleges, or recognized institutions located in India.

Public Provident Fund (PPF)

• Contributions to a child’s PPF account are deductible under Section 80C.
• Interest earned and maturity proceeds are entirely tax-free, making it a secure and tax-efficient investment option.

Sukanya Samriddhi Yojana (SSY)

• This scheme is especially for girls.
• Parents can invest up to Rs. 1.5 lakh annually, claiming deductions under Section 80C.
• Both interest and maturity amounts are tax-free, and partial withdrawals are allowed for higher education once the girl turns 18.

Equity-Linked Savings Schemes (ELSS)

• ELSS mutual funds provide tax-saving benefits under Section 80C and have the potential for higher returns over the long term.
• They come with a 3-year lock-in period and are suitable for parents who want to beat inflation while saving taxes.

Education and Hostel Allowances

• Education allowance: Rs. 100 per month per child (up to 2 children).
• Hostel expenditure allowance: Rs. 300 per month per child (up to 2 children).

Healthcare and Medical Expense Benefits

Health Insurance Premiums (Section 80D)

Parents can claim up to Rs. 25,000 in deductions for health insurance premiums covering their children. This deduction increases to Rs. 50,000 if the policy also includes senior citizen parents.

Medical Treatment for Severe Diseases (Section 80DDB)

Parents can claim up to Rs. 40,000 for medical expenses incurred on specific severe diseases affecting their children.

Premium Waiver Benefits

Child insurance plans often include premium waiver benefits, ensuring that the policy continues even if the parent passes away. This ensures uninterrupted coverage and provides tax-free payouts under Section 10(10D).

Special Tax Benefits for Families with Special Needs Children (Section 80DD)

Who can claim?

• Individuals or Hindu Undivided Families (HUFs) residing in India.
• The deduction is for dependents such as parents, spouse, siblings, children, or HUF members with disabilities.

Who is excluded?

• Non-resident individuals and other entities like corporations and partnerships.
• If the disabled dependent claims a deduction under Section 80U, the taxpayer cannot claim under Section 80DD.

Eligible Expenses

• Costs for medical treatment, rehabilitation, training, or care of a dependent with a disability.
• Insurance premiums are paid for policies ensuring the maintenance of the disabled dependent.

Disabilities Covered

As per the Persons with Disabilities Act, 1995, and Section 80DD, disabilities include:

• Blindness
• Low vision
• Hearing impairment
• Locomotor disability
• Mental illness
• Autism
• Cerebral palsy
• Leprosy-cured
• Mental retardation
• Multiple disabilities

Deduction Amount

Disability Level: 40% to 79% up to Rs. 75000 deductible, 80% or more (severe disability) up to Rs. 1,25,000

Tax-Saving Strategies for Parents

• Begin investing in tax-saving instruments like PPF or Sukanya Samriddhi Yojana early to maximize the benefits of compounding.
• Combine tuition fees, PPF contributions, SSY investments, and ELSS mutual funds to reach the Rs. 1.5 lakh limit under Section 80C.
• If both parents are taxpayers, they can claim separate tuition fees and education allowance deductions, doubling the tax savings.
• Use savings accounts to earn tax-free interest of up to Rs. 1,500 per child under Section 10(32).
• Opt for child insurance plans with premium waivers and strategically time the payouts to coincide with education time.

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Common Mistakes to Avoid

• Failing to claim education-related deductions we discussed earlier.
• Ignoring deductions available under Section 80D, 80DD, or 80DDB for healthcare and special needs.
• Missing the opportunity to split deductions, such as tuition fees or health insurance, between both parents.
• Not claiming available benefits for dependents with disabilities under Sections 80DD or 80U.
• Automatically opting for the New Tax Regime without evaluating benefits under the Old Tax Regime.
• Forgetting to file claims for deductions on time or submitting incomplete documents.
• Ignoring tax exemptions on income earned by children’s investments under Section 10(32).

Pre-planning your child’s future is a priority for every parent, from selecting the right schools to planning for higher education. What every parent should also do is to take advantage of the tax benefits available for expenses related to their children. This will help you save a lot of money for their future and also for yours.

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