As you build wealth and make plans to enable your children to live a better, more comfortable life, you must also take note of the tax implications of the wealth you are creating for your family.
In most cases, tax is applied to a corpus every time it changes hands, and as your corpus grows, you also pay taxes on the returns.
This affects your earnings as you are expected to shell out a certain percentage as taxes. The more you earn, the higher the percentage of tax you pay.
When you are looking at building your corpus/wealth that you will ultimately pass on to the next generation, you must look at legally safe ways of saving tax on your funds.
Few tax-smart ways to help your kids financially
1. Start with a bank account
While piggy banks are cute, they don’t really give you much benefit. When you open a savings bank account for your child, the interest income up to Rs 1,500 per child for a maximum of two children, per year, will be tax-exempt under Section 10 (32). This implies you can save up to Rs. 3,000 in tax if you have two kids.
2. Invest in your child
A good way to start building a corpus for your child’s future is to start putting money into PPF, mutual funds, and some traditional plans.
Your investments in these instruments under section 80C are fully tax-exempt till you reach the limit, but the income from this is added to your income and taxed at applicable rates.
One of the tax-smart ways around these investments is to keep your profits from these under Rs. 1 lakh
If you have not exhausted the Section 80C limit of Rs 1.5 lakh a year with your investments, you can invest for your child to avail of the full exemption.
For instance, you can invest in the PPF, Ulips, mutual funds, and some traditional plans, but remember that the income from these will be added to your income and taxed at the applicable rate.
This can be avoided by investing in instruments that do not tax income, such as the PPF, or equity mutual funds, where the profit is not taxed if it is less than Rs 1 lakh a year.
Additional read: Money mistakes to avoid in the 30s
3. Invest in adult children’s names
If your child is above 18 years of age, his / her income from his or her investments will be independent.
It will not be clubbed under your income. So if his / her earnings are in the nontaxable slab, you will be able to save on tax by gifting money for his / her investments.
4. Tuition fees can save you cash
This is a really small amount given the large education fees being charged these days but when you are looking for tax-smart ways of building your wealth, every little bit helps.
Under section 80C, with a deduction limit of Rs. 1.5 lakhs, you can save Rs.100 per month per child paid towards tuition fees for up to two children.
That’s Rs. 2400 per year if you have two children and you can also claim an exemption for hostel fees of up to Rs. 300 per month, per child. In the case of two children, this amount totals Rs. 7200 per year.
These amounts may seem small but can add up to a handsome sum over the year.
5. Education loan is tax-smart
As in home loans, education loans taken for your child’s higher education can give you tax shelter. The interest component paid on the loan will be deductible under Section 80E for eight years from the time that the repayment starts.
6. Invest in health insurance
Premium paid towards health insurance of your children up to Rs. 25,000 a year is tax-exempt under Section 80D. Expenses incurred for preventive health check-ups up to Rs 5,000 are also included in this Rs. 25,000/-.
7. Deduction for disabled children
Parents of differently abled children or offspring with certain diseases are eligible for deduction under Section 80DDB for the medical expenses incurred.
A deduction of Rs 40,000 or actual expenses can be claimed, whichever is lesser, in case of a disease. For 40%- 80% disability, you can claim up to Rs 75,000, and for over 80%, the available deduction is Rs 1.25 lakh.
As bringing up children becomes increasingly expensive, finding tax-smart ways to help your children can help you build a decent fund over time.
Be on the lookout for these and other tax-smart strategies that you can put into practice around your children and even parents.
In most cases, the earning members are carrying the financial burden without being aware that many of these expenses are eligible for tax deductions. So do read up and keep saving!
