- March 14, 2016
- Category: Tax Planning
Everyone knows about the usual options of annual tax saving like taking benefit of section 80C, claiming medical expenses, house rent allowance, etc. But there are some unconventional ways to reduce your tax outgo. You can save tax through your family! As per Indian Tax laws, gift given (in cash or kind) to relatives is not taxable in their hands. While there are some tax implications of investing the gifted money in the name of family members, let us understand how you can still legally do it and reduce your tax liability:
- Invest through your spouse: You can gift any amount of money to your spouse without attracting tax. However, income generated from the gift given to spouse is subject to taxation. The provision of clubbing income will apply here. For instance, if you gift your spouse Rs.5 lakhs, it will not be taxable. But if your spouse invests this amount, say in a fixed deposit at 10 % p.a., the interest of Rs.50,000 will be clubbed to your income and taxed as per your slab. However, in this case you can still take advantage of the gifting provision legally if your spouse is not working or in a lower tax bracket compared to you. Taking the above example, if your spouse reinvests Rs.50,000 and earns interest on it, it will be treated as her income. Thus, the income reinvested on the earned income is not taxable in your spouse’s hands. Another smart way is to invest money in tax free options like PPF in your spouse’s name. The tax free income can be reinvested later by your spouse in fixed deposits, debt funds and will be treated her as income without attracting tax.
- Invest through parents: Gifting money to parents as well as the income generated on investing it is tax exempt. Clubbing of income provisions do not apply here. Senior citizens enjoy a basic exemption limit of Rs.3 lakh p.a. and for super senior citizens (over 80 years) it is Rs.5 lakh p.a. If your parents are retired & do not have any high income, and you fall under the highest tax bracket, you can invest your surplus savings in their name and earn tax free income. For instance, you can invest up to Rs.30 lakh (Rs.15 lakh each) in the name of your parents in a fixed deposit yielding an interest rate of 10% p.a. This will fetch you a tax free income of Rs.3 lakh. If your parents are above 80, you can invest up to Rs.50 lakh (Rs.25 lakh each) and earn a non-taxable income of Rs.5 lakh annually.If any or both of your parents have continued their PPF accounts after retirement and your own annual limit of Rs.1.5 lakh is exhausted, you can invest in their name. You can invest a maximum of Rs.3 lakh (Rs.1.5 lakh in the name of each parent) and earn tax free income. Similarly, you can invest in senior citizen scheme in your parent’s name annually up to Rs.30 lakh (Rs.15 lakh each). If you are an active investor in the stock markets, you can open a demat account in your parents name and trade shares. If you book short term capital gains but your income (excl. short term gains) is below the basic exemption limit, you can adjust the shortfall against capital gains and the balance will be taxed at 15 per cent. You can also claim an additional tax benefit on health insurance premium paid for your parents, besides claiming for self. Under S/80D, you can claim a tax deduction of Rs.25,000 from your taxable income for mediclaim premium of your parents. If they are senior citizens, the tax benefit is higher at Rs.30,000. For the medical treatment of any parent or both having disability, you can claim tax deduction up to Rs.75,000 under S/80DD. In the case of severe disability, you can claim tax benefit up to Rs.1 lakh.
- Invest through major children: The clubbing provisions do not apply once a child turns 18 and he/she will be treated as a separate individual for all tax purposes. So, like in the case of parents, you can also invest in the name of major children without attracting tax. You can show the money as interest free loan granted to your children and invest in their name. You can invest up to a maximum Rs.2.5 lakh p.a. if they are not working and can earn tax free income. You may not be comfortable gifting a lot of money to your major children. Ensure that they do not take advantage of it. Further, if you have a handicapped child, you can claim tax benefit under section 80DD for medical expenses similarly as in the case of parents.
Due to lack of general awareness, many people do not know these simple rules and end up paying high tax. This is particularly true in the case of fixed income options like FDs and corporate bonds which are not lucrative for individuals falling under the 30 per cent tax bracket. Channelising investments and broad basing your income in the names of your family members will greatly help you to reduce your tax liability in a legal way.