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Did you know that an individual can, in addition to the tax benefits she/he is entitled to, also leverage the benefits available to family members to reduce this liability?
Are you looking for ways to reduce your tax liability to a minimum?
Did you know that an individual can, in addition to the tax benefits she/he is entitled to, also leverage the benefits available to family members to reduce this liability?
However, proceed with caution to ensure that such actions don't violate the letter or the spirit of tax laws.
Gift to parents
You can gift money to your parents if they fall into the non-taxable or a lower tax bracket.
"Gifts received from 'specified' relatives like parents, spouse, children, etc are not treated as income. They are fully exempt from income-tax without any monetary limit," says Vaibhav Negi, tax practice head, ABA Law Office.
The spouse of an individual, brother or sister, brother or sister of the spouse of the individual, brother or sister of either of the parents of the individual, and any lineal ascendant or descendant of the individual are specified relatives, according to tax rules.
"Since people above the age of 60 years can claim up to Rs 50,000 as tax-free interest earnings from bank fixed deposits, savings accounts, post office schemes, etc, putting excess funds into the accounts of one's parents can reduce an individual's tax liabilities," says Sandeep Bajaj, managing partner, PSL Advocates & Solicitors.
This tax benefit is available under Section 80TTB.
Even if the interest exceeds the exemption limit, your parents are likely to pay a much lower tax rate than you (if their income has reduced post-retirement). "Moreover, those aged 80 and above can earn up to Rs 5 lakh tax-free per year," says Bajaj.
Pay premium, rent
Under Section 80D of the I-T Act, you can claim a tax deduction of up to Rs 50,000 if you purchase health insurance for your senior citizen parents.
The deduction available is Rs 25,000 if the parents are under 60.
If you are a salaried employee living with your parents, you can pay rent to them and claim an exemption on house rent allowance. This again works well if they fall in the zero or lower tax bracket.
Your parents can also claim a deduction of 30 per cent of annual rent for repairs and maintenance under Section 24.
Lend to spouse
Instead of a gift, consider giving a low interest-rate loan to your spouse.
"If a husband gives a loan of, say, Rs 20 lakh to his wife at a reasonable rate, say 6 per cent, then the interest income of 6 per cent would be added to the husband's income. The income earned by the wife on investing Rs 20 lakh, however, will be taxable in her hands," says Suresh Surana, founder, RSM India.
Suppose that the wife invests this amount in mutual funds and earns a return of 10 per cent. That 10 per cent income will be taxable in her hands.
Clubbing provisions will not get attracted in this case as the husband has charged a reasonable interest rate of 6 per cent from his wife.
"Whenever a husband gives a loan to his wife, or vice versa, the tax implication of the move needs to be factored in.
The transaction shouldn't result in tax inefficiency and should be within the four corners of the law," says Surana.
In the above example, even though the interest income is added to the husband's income and taxed, there is still a saving.
Suppose that the wife invests the Rs 20 lakh in an equity mutual fund and earns a return of 10 per cent.
Capital gain of less than Rs 1 lakh in a year is tax-free. This will help lower the couple's tax liability (assuming that the husband has exhausted his Rs 1 lakh limit and the wife hasn't).
Take home, education loan
A husband and wife can also save tax by taking a home loan jointly.
"Taking a joint home loan will allow each spouse to claim sizeable deduction under Section 80C of the I-T Act," says Pratyush Miglani, managing partner, Miglani Verma & Co.
With a joint home loan, they can claim a total deduction of Rs 3 lakh (Rs 1.5 lakh each) under Section 80C on principal repayment.
In addition, they can claim a cumulative deduction of Rs 4 lakh (Rs 2 lakh each) on a self-occupied property under Section 24(b).
Thus, they will be able to avail a total deduction of up to Rs 7 lakh, double the amount an individual could have.
Pallav Pradyumn Narang, partner, CNK RK, says, "In the case of couples where a spouse is still studying, one of the spouses can take an education loan. This will make them eligible for further deduction."
Enlist your sibling's help
Money gifted to a sibling will also be tax-free in the latter's hands.
Bajaj says, "If your Section 80C limit of Rs 1.5 lakh is exhausted, you can gift money to your sibling. The latter can invest it in the Public Provident Fund.
"In this case, though you won't get the benefit of tax deduction, the amount invested will earn a tax-free return of 7.1 per cent a year."
Bajaj informs that money spent on your dependent siblings' training, rehabilitation, or medical care is eligible for deduction up to Rs 75,000 annually.
If you pay the life insurance premiums of schemes such as Jeevan Vishwas Endowment Assurance and Jeevan Aadhar Entire Life Insurance plans on behalf of a disabled, dependent sibling, the premium paid will be deductible.
Finally, experts say transactions that close relatives enter into for tax saving should be examined closely for permissibility.
"The tax planning should be within the four corners of the law and should not be in the nature of tax evasion," warns Surana.
Children can help save tax
Deduction can be claimed under Section 80C for investment in children's name in PPF, life insurance premium etc.
80C deduction can also be claimed on certain tuition fees paid for maximum 2 children.
Deduction under Section 80E can be claimed by the parents on children education loan interest payment.
Deduction under Section 80D can be claimed by parents for health premium paid for their dependent children.
Parents can claim exemption under Section 10(32) of Rs 1,500 per minor child on any income in their name.
Parents can jointly own property with their adult children, which can help save tax.
Feature Presentation: Ashish Narsale/Rediff.com
