Much like any other aspects tax planning for special needs children families is a must to do affair. Be it salary income or investing the hard earned savings, taxes impact on what you actually earn. With expenses already on higher side there is a need to save more from the income. Efficient tax planning is one of the options to ensure outgo is minimized.
Why Tax Planning is Important?
Taxation has large impact on your savings. When combined with inflation it is actually a double hit. If you fail to address taxes in your investments or earnings then you are left with too less in your hand. This may result in a shortfall to contribute for your future.
Let’s take this situation. Your income is in the slab of 30% and you invest Rs. 50000 in Fixed Deposits earning 6.5%. Now interest earned from Fds is taxable at your income slab and so the earnings here will reduce to meager 5%. Does that even beat inflation?.
The above situation can be nasty in the long term. When you have a special needs child then every penny save add to your child security. Thus it’s become important that tax planning is included in your financial planning and addressed at the right stage with right options.
Three Stages of Taxation
For any individuals life tax planning is done at three stages:
When You Earn
Whether you are salaried, a professional, or a businessman you are liable to pay tax on the income you earn. The taxability on your income keeps increasing as your income increases. There are provisions available to reduce this liability and enhance your earnings.
When you Invest
Earnings from your investments too is impacted. Different investments may be treated differently. Long term or short term, debt or equity there is differential in the tax treatment. Tax efficiency is what you aim for when you invest your money.
When Wealth Is Distributed
During distribution of wealth at your death or earlier different tax situation may arise. There might be some pending tax liability or tomorrow we may have estate tax brought in. Then there are different investment/insurance avenues where tax is levied at different situation. There are exemptions available for different investments during death but may not be on distribution in living.
Thus income tax liability will arise at all stages of life. How you deal with them is a major element of your financial planning.
Income Tax Provisions
There are different provisions are in form of deduction or exemptions and applicable at three different stages we have discussed above. You have to take benefit from these provisions to reduce your tax liability and receive more money to plan for your future.
There are certain provisions which provide direct deduction from income. These provisions don’t have much to think about and any special needs parent can plan for availing them.
Here are some of these provisions :
This is the major section where disability has been defined for availing an income tax benefit and the definition is applicable to all other sections. The disabilities included under this section are as specified under “Persons With Disability (Equal Opportunities, Protection of Rights and Full Participation) Act 1995.
The lists of disabilities included as per this act are as follows:
- Low Vision
- Leprosy Cured
- Hearing Impairment
- Loco motor disability
- Mental retardation
- Mental Illness
Since Disability Bill 2016 has been passed now more disabilities will get covered under sec 80U where tax benefits can be claimed.
Eligibility and Quantum Of Deduction
Under this section following are the individuals who can claim deduction:
- An individual (Resident or Foreign National) who is an Indian Resident
- He/she suffers not less than 40 per cent disability
One can claim up to Rs. 1,25,000 if severely disabled (more than 80%) or Rs 75,000 with moderate disability between 40%-80%.
To claim this benefit one needs to obtain the disability certificate from a government (Central or State) medical authority.
This is the section where most special needs families can derive benefits. Here if you have a disabled dependent then you can claim the expenses incurred on his/her treatment as a deduction form your income.
Who is a Dependent?
A spouse, a child, parent or a sibling are considered as dependent if any individual. For HUF any member of HUF will be considered as a dependent.
What Can be claimed?
Here the deduction can be claimed in two conditions:
- When expenses have been incurred for medical treatment, nursing, rehabilitation or training of a special needs dependent
- When premium is being paid for specific LIC policies from where the benefits to special needs dependent will be derived
For severe disability, the amount available for deduction is Rs 1.25 lakh while for moderate disability it is Rs. 75,000. Here also, one needs a disability certificate from the government (central or State) medical authority to claim the benefit.
This benefit is not exactly on disabilities but certain specified disease/ailment. Under this benefit any expense incurred on the medical treatment of specifically listed diseases or ailments for himself or dependent can be claimed as deduction.
One can claim up to Rs 40,000 or the actual amount, whichever is less. In case the expenditure is incurred on a senior citizen i.e. age above 60 years, then the amount will be Rs. 60,000. But if age is above 80 years then Rs 80,000 can be claimed as deduction.
Sec 64 – Clubbing of Income
This provision deals with clubbing of minor income with parents. Here if a minor child earns any income then it sis gets clubbed with parent’s income. So it’s the parents who then are liable to pay tax on minor income. Any investment income such as fds, real estate or others if invested in minor name then there is no major benefit derived
But this clubbing of income is not applicable if there is a disabled child. In that case the income earned in the child name is treated as the child income and assessed on child name. Put simply the income of the child is assessed separately meaning the child is treated as separate tax entity.
All of the above discussed provisions has element of tax planning in it. Apart from this there are benefits on earrings for investments. It needs a separate discussion . But the objective is to avail all these benefits to the fullest ensuring tax can be minimized.
Tax Planning You Should Do
When the income is not clubbed with the parent’s income, it is treated as that of the child. This allows the income to assess for the child as a separate entity. These benefits the parent too as contributions needs to start at an early age of the child. Therefore, any income generating asset, such as FD or Bonds or even a rental income can be invested in the child’s name and gets assessed separately. This has tax saving implications especially when parents are in the higher slabs. With the child’s income being assessed separately, all the benefits available to Individual/HUF along with disabled can be claimed to reduce the outgo.
Other tax benefits are available but they mostly pertain to the disabled themselves. The provisions mentioned above are the ones where special needs children families can derive the maximum benefits.
Investments must also be tax efficient. One option highlighted above is investing in the child’s name whereby the child’s income is assessed separately. Parents must carefully consider investment options from the tax planning perspective as tax can substantially reduce the earnings. So whether invested in equity, debt, real estate, gold or other assets, the selection of assets allocation should maximize the post-tax returns. Even when a trust is being formed, the structure should accommodate efficient tax planning so that the receipt and distribution of funds involves minimum tax outgo. There may also be benefits that are not received directly, but through various schemes run by the government. Family with special needs children should analyse all aspects of applicable taxes at the planning stage itself, to derive the maximum benefits.
Currently, inheritance tax is not applicable in India and so assets received through Will are free from this liability. But who knows the situation may change in the future.
Estate planning for asset distribution after death must cover how the assets will be transferred to the trust with minimum tax liability. For example, if real estate is transferred to the trust in your lifetime, then it will incur costs related to stamp duty etc. But if it comes through a Will, the cost will be far lower. Similarly, another consideration is leaving a legacy to an individual. Not advisable but if done it will substantially increase the tax outgo for the individual concerned. This may lower the final income distribution to the special needs child.
Gifting has its own benefits like tax exemption among relatives and lower stamp duty in some states. Gift to a private trust also enjoys exemption and so should be utilized when relatives/friends wish to allocate funds for your child. All the available provisions should be studied while working on different aspects of financial planning.
Here is a Checklist for an efficient Tax Planning :