As China pushes for a 3-child policy, Indian income tax laws favour only 2 kids per family

From income-tax deduction benefits on tuition fees to defining number of family members eligible for leave travel allowance, India’s income tax rules limit benefits to two children per family

June 05, 2021 / 10:21 PM IST

On May 31, China announced that it has permitted each couple to have three children. This is a major shift from the two-child policy it had been following since 2015.

In India, the Income Tax rules, which were initially introduced in 1961, follow the basic principle of “Hum Do, Hamare Do.” The subtle messaging was made clear through the financial principles governing tax deductions.

A Population Control Bill was introduced in Rajya Sabha in July 2019. It proposed income tax rebates and health insurance benefits for families with two children and penal action on loans at higher rates for those with more than two-children. But no concrete evidence suggests that the Indian Legislature or the judiciary is in favour of a blanket ban on having more than two children.

Here are some relatively unknown tax deductions available to parents who have no more than two children.

Education allowance

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Though all salaried employees are permitted to claim an exemption of Rs 100 per month, per child, towards their education, it is restricted to two kids. Note that the children’s education allowance benefit is over and above the tuition fee benefit that a parent can claim. “These limits have been in place for years and need to be revised. We have sent our representation to the Government, many times stating the period when these limits were introduced and the need to revise them,” says Ameet Patel, Partner at Manohar Chowdhry & Associates.

Hostel expenditure

If you have children studying in a different city and they use the hostel facility, then for each child you can claim an exemption of Rs 300 per month. This hostel expenditure allowance is to be claimed under Section 10 and is again restricted to only two children. So, if you have two children using the facility then the benefit amounts to Rs 7,200 per year.

LTA tax benefit

The leave travel allowance tax exemption is permitted twice in a block of four years for an employee towards claiming travel expenses for the family. But, one must note that the “family” mentioned here comprises only two children born on or after October 1, 1998. If your children are born prior to this date, then you can claim exemption for more than two children.

Tuition fee

The income tax benefit for claiming tuition fee of your child under Section 80C is restricted to a maximum of two children each year. Thus, the total benefit is restricted to Rs 2400.

But there is another interpretation for this tuition fee rule, which parents having more than two children have been claiming to their benefit. So, the law provides that each parent can claim the tuition fee benefit of two children. So, a couple can claim a benefit of two children each – or four children together.

“Like every other asset class, the tuition fee benefit can be claimed by each individual for two children. But we need to understand that the overall cap of Rs 1.5 lakh is applicable for the benefit that can be claimed under Section 80 C,” says Patel.

Savings bank interest

Have you opened a savings bank account for your children? You are allowed an exemption of Rs 1,500 earned as savings bank account interest per child. But there is again a cap of two children for whom the interest income is tax-exempt under Section 10 (32). So, the maximum amount you can claim as tax exempt on behalf of your children under savings bank account interest is Rs 3,000.

Also read: These two small banks offer the highest savings bank account interest rates

Investment and clubbing

If investments made in the name of one's child earn an income, then the amount is added to the parent’s income in case of a minor child. However, income tax provisions allow you to take the benefit of a deduction of Rs 1,500 earned on such earnings. But this is again available for up to two children.

Investment instruments

Some government-driven investment instruments, too, follow the two-child guideline. For instance, only two Sukanya Samriddhi Yojana (a saving scheme for girl children with tax benefits) accounts  are allowed for a family.

Sudhir Kaushik, co-founder of TaxSpanner.com says, "If you have more than two children and are losing out on too many tax exemptions, then consider an HUF (Hindu Undivided Family) structure to plan your tax savings."
Khyati Dharamsi
first published: Jun 3, 2021 09:39 am

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