Income Tax Exemption – Must Know Advantages Having a Child Can Provide
Now is that time of the year when companies request for proof of income tax saving instruments. Everyone gets busy with property loan documents, mutual fund investments, and Mediclaim. Deduction on interest paid towards property loans can take a huge chunk off your taxable income. Other tax savers like investments made on ULIP, PPF, Post Office Saving Schemes, and Life Insurance can also help in reducing your tax burden.
But did you know that you may have a huge added advantage over others if you have a child? Your child can help you avail tax exemptions for tuition fees paid, education loans taken, treatment of disabilities, investments on the name of a minor child, or even medical expenses of your dependent child. The rebate offered under section 80C and 80DD come as a relief when quality education has not only expensive but also elusive. Let us understand how your child’s education can help you save tax this season.
How To Claim Tax Benefits on Your Child’s Education?
You can claim tax benefits by submitting school fee receipts to your employer. Form 12BB should also include this amount before proof of payment is submitted. Listed below are the different benefits that can be availed on children’s education.
1. Deduction on Payment of Tuition Fees
Having a school going child has an inherent tax advantage for the parent because it is eligible for a tax benefit within the purview of Section 80C of the 1961 Income Tax Act. Your child’s tuition fee is one of the components of 80C which is eligible for exemption within the limit of Rs. 1,50,000 per annum.
The exemption under this Section is eligible only on the child’s tuition fee. If the parent has paid capitation fee, admission fee, uniform and book fees along with the tuition fees, these expenses will not be eligible for exemption. Transport charges, hostel fees, and other donations will not be eligible for exemption either.
The sum deductible under 80C is restricted to 2 dependent wards. This, however, means that each parent has an individual restriction of 2 dependent children. If a family has four school going children and both parents are working, then both can together claim the benefits for all their children. The deductions under this section are available for Indian schools and universities. Affiliated universities too are included under the Act.
Payments made for the education of spouse, brother, sister, self, or other relatives are not eligible for deduction under Section 80C. Also, this facility is not available for part-time education.
2. Exemption on Interest on Education Loans
The Income Tax Act not only provides relief on tuition fees for school-going children but also lightens the burden on higher education loans. If you avail an education loan, the interest accrued is completely exempt from the tax deduction. This facility is available only if the child is enrolled in a full-time graduate course.
3. Exemption on Education and Hostel Allowance
Individuals employed in India have a further exemption in the form of child education allowance up to Rs. 100 per month per child for a limit of two children under Section 10(14). It also allows Rs. 300 per month for two children as hostel expense allowance. These expenses have to be incurred in India.
4. Exemption on Scholarships
Any scholarship received by a student for meeting the cost of education is also exempted from Income Tax under Section 10(16).
5. Exemption on Non-education Related Sections
If you invest in the name of your minor child, you can claim Rs. 1500 deduction on such income. Medical expenses incurred on the treatment of a child up to the limit of Rs. 15,000 per child for 2 children will be deducted upon furnishing of medical bills. Similarly, treatment expenses incurred for disabled children are also eligible for deduction under Section 80DD. The limit is Rs. 50,000 for a normal disability (defined as 40% impairment) and Rs. 1 lakh for severe disability (defined as more than 80% impairment). Section 80DDB allows a deduction for treatment of certain specified illnesses to the extent of Rs.40,000 from the total income.
Setting up a trust in the name of your minor child can also help to save tax. Transfers made have to be irrevocable so that no claim can be made to such money in the future.
Filing income tax returns is confusing for many. Here are a few questions that are frequently asked about the exemption on school tuition fees and education loans:
1. Is There a Tax Exemption Limit on School/Tuition Fees?
The Income Tax Act specifies that exemptions under Section 80C can be claimed to the extent of Rs. 1.5 lakh. This means that all saving instruments including pension funds, PPF, and tuition fees have to be under the limit of Rs. 1.5 lakh. To avail the full benefit of child tuition fee tax exemption in India, you should first determine the total tuition fees you pay in a year and then make other tax saving investments in such a manner that your total investment under Section 80C totals the maximum limit.
2. When Can I Claim Deduction/Exemption on the Tuition Fee I’m Paying?
You can claim an exemption on fees paid only in that financial year. For example, if you have paid the fee in April for the school year 2018-19, then you can claim the deduction for the financial year 2018-2019.
3. Can I Claim a Deduction Under Section 80C Towards My Adopted Child’s School Fees?
Exemptions remain the same for tuition fees paid, whether the child has been adopted or not.
4. Can I Claim Tax Benefits Under Section 80C for 3 Children?
Benefits for three children can be claimed if both parents are working and both are income taxpayers. One parent can claim benefits for two children while the other parent can claim the benefit for the third child.
5. Can I Claim a Deduction If My Child Is Studying Abroad?
You cannot avail income tax benefits under Section 80C if your child is studying abroad.
6. Can the Fee Paid for Nursery/Pre-School Be Claimed as a Tax Exemption?
Nursery and pre-school fees are also eligible for a tax exemption under the IT Act.
7. Which Institutes Are Eligible for Tax Benefits?
Any Indian school, college, or university is eligible for an exemption. Tax benefit is available to all parents who are employed and have school-going children, irrespective of the class their child is studying in. Only foreign universities are not included for an exemption according to the Income Tax Act.
Keeping in mind the sharp rise in the cost of quality education over the last few years, some citizens have taken it up with the authorities to review the existing exception parameters for hostel allowance and child education allowance. However, these limits remain the same since the year 1997.
The government had increased its focus on education and development of skills. Given this emphasis on education, we hope that better incentives are provided to the individual taxpayer to assist them in meeting the mounting cost of education. Good education and subsequent employment are, after all, the stepping stone to the economic growth of a country.