How your Children can Help you Save Taxes?

This is third in series of how your family members can help you save taxes. Here are the first two:

    1. How investing intelligently on your wife’s name can save taxes
    2. How your parents can lower your taxes

In this post we tell you how your children can be part of your tax planning and in the process help you save taxes.

1. Investing on the Name of Adult children

As per income tax rules, an adult child (with age more than 18 Years) is considered an independent entity for income tax and any income earned by them is not clubbed with their parents. So if your adult child does not have any income (as happens in most cases at least till the child is 22 years of age), you can invest on his/her name and save good amount in taxes.
Your child would be considered as adult by income tax rules in the financial year he turns 18. So you can start investing even when he is 17 but would be 18 before March end of the financial year.

Here is an example:

  • You invest Rs 1 Lakh in SBI Bank FD offering 9% per annum for 1 Year.
  • At the end of year you would get Rs 9,000 as interest.
  • If you fall in 30% tax bracket you would need to pay Rs 2,781 as tax and would be left with only Rs 6,219.
  • On the other hand if the money was invested on your adult child’s name you might not pay any tax at all if their total annual income was below the taxable limit of Rs 2 Lakhs. So you can save Rs 2,781.
  • This on a large amount of fixed deposit can be good saving.

Usually by the time children are adult, people have good amount in fixed deposits mainly for their children’s education/marriage. It would be good idea to transfer the amount to your child’s account and save your taxes!

However there is also a note of caution, you should also look into the psychological and legal aspect of these kinds of investments. Your son/daughter is the legal owner of the investment and so he/she is in position to liquidate the investment. So only follow this route if you think your child is with you and won’t do anything without your permission.

Remember maintaining healthy relationship is much more important than saving taxes!

Download:Tax Planning ebook for Salaried for FY 2018-19

2. Claim Tuition Fee for Tax Exemption

Section 80C of income tax allows you to claim exemption up to 1 Lakh on tuition fee for maximum of two children in a financial year. Below are some points to be kept in mind for above exemption:

  • The deduction is available for full time courses only
  • The deduction is not available for tuition fee to coaching classes or private tuition
  • The educational institute should be located in India, though it may be affiliated to any foreign university
  • The following expenses are not considered as tuition fees – Development Fee, Transport charges, hostel charges, Mess charges, library fees, Late fines, etc

Also Read: 13 Important Changes in Tax Rules from FY 2018-19 

3. Investing on the Name of Minor Children

As per income tax rules, the income of minor children (below 18 years of age) is clubbed with the parent having higher income. But there is small caveat.

There is exemption of Rs 1,500 per child for two children. So you can invest Rs 15,000 earning 10% interest on each of your child’s name and get the interest tax free.

Go ahead plan your taxes and don’t forget to include your spouse, parents and children in saving taxes!

11 thoughts on “How your Children can Help you Save Taxes?”

    1. If you are investing for long term (i.e. 10 – 15 years) go for some equity mutual funds if you can bear the risk else PPF is safe. For shorter term and in this over-valued market I would suggest debt fund

  1. Hi, thanks for sharing really helpful information. I need a clarification of the component called ”gift money”, if i gift money to my child or parents for example i gifted 50000 to my child, will it be deducted from my income or i will still pay tax on it.

    1. There is no deduction for gifting money. However as your child would not be taxed for receiving gifted money.

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