• Jan
  • 16
  • 2015

Your parents can help you save tax / reduce your tax liability

Posted In Income Tax | , | 39 Comments » Print Friendly and PDF

CA Sandeep Kanoi

Saving tax is the main motto of all taxpayers. While some hire chartered accountants, others pore through tax laws, or ask friends to find out if there are ways by which they can save.

Actually, the simplest way of saving tax is by investing through parents and children. If you invest in the right instrument, the rate of return may be higher as well. Your parents can help bring down your tax liability in several ways. Here are some smart strategies that can reduce your tax outgo.

In this article we have listed four tips to save Tax Through Your Parents which includes 1. By Investment & Share Trading  in your parents name 2. By Paying Rent to Parents to claim HRA or Section 80GG deduction 3. By shifting losses on  Shares by off market Transactions 4. By doing share trade in Parents Name. 

1. Investment & Share Trading  in your parents name

ID-10044361a. Shift Interest Income to parents Account

Every adult enjoys a basic tax exemption limit. For senior citizens (above 60 years), the basic exemption limit is Rs 3 lakh a year and for super senior citizens (Above 80 Years) the exemption Limit is Rs. 5 Lakh. If any or both of your parents do not have a high income but you have an investible surplus, you can avoid tax by transferring money to them which can then be invested in their name. Even if they have taxable income  but their Income is not good enough to be charged at highest rate of tax and you are paying tax at highest rate of tax than you can still take the benefit of lower slab rates.

Here’s how you go about it. Income tax deductions allow senior citizens a tax-free income of Rs 3 lakh(above 60 years) and  super senior citizens (Above 80 Years) the exemption Limit is Rs. 5 Lakh. To exhaust this limit, say you gift Rs 30 lakh to each parent in cash (Includes Payment by cheque) , which they invests in senior citizens savings scheme that earns a return of nine per cent and pays interest every quarter. Each will get yearly interest of nearly Rs 2.7 lakh.

That means both parents have earned Rs 5.40 lakh from the senior citizen saving scheme.  A total savings of tax on Rs 5.40 lakh – the tax-free limit (Rs 3 lakh) that each parent enjoys. So, they don’t even need to file tax returns.

b. Invest in PPF account of Parents

The Public Provident Fund offers tax-free income but there is a limit of Rs 1,50,000 a year. Invest in your parents’ names if your own limit is exhausted.

c. Trade / Investin Shares in Parents Demat Account

Or open a demat account in their name and dabble in stocks. Short-term capital gains will not attract 15% tax if the basic exemption limit has not been crossed.

Here I would like to mention that like wife & Minor Child clubbing provisions do not get attracted in case of gift or Transfer of money to parents. There is also no limit under the Income Tax Act,1961 on the amount you can give to your parents.

2.  Pay them rent if you live in their house

This option is mainly for those having Salary Income and receiving House Rent Allowance and leaving in parents’ house.  You can pay them rent to parents to claim House Rent Allowance exemption. This is possible only if the property is registered in the name parents.  If Property is jointly owned by parents than you can divide rent between them by paying them seprately so that the tax liability gets split between the two parents. If their income exceeds the basic exemption limit, you can help them save tax by investing in their name under Section 80C options such as the Senior Citizens’ Saving Scheme, five-year bank fixed deposits or tax-saving equity mutual funds.

Further Those not having salary Income can claim deduction U/s. 80GG but in this case Maximum allowable deduction  is Rs. 2000/- Per Month. Section 80GG dealing with deduction on rent paid where the taxpayer doesn’t receive HRA, specifically mentions that the taxpayer or his or her spouse/ minor children should not own any residential accommodation where the taxpayer resides, performs the duties of his office or employment or carries out his business.

For more details please visit the following link :-Section 80GG Deductions – For rent paid

3.  Sell them shares and offset Capital Losses

f you have kept loss making shares in your portfolio for over a year, you can consider selling them to your parents in an off-market transaction. A long term capital loss on shares could be set off against long term gains if you sell the shares in an off-market sale, which is a transaction without going through the exchange. Finding buyers off-market is difficult, therefore, you could sell them to your parents in order to set off losses.

The main criteria for this arrangement is that shares should be sold at market price and the payment should be made via cheque.

4.  Mediclaim – Health insurance policy for parents

To save tax through parents  Buy a health insurance policy for them and get deduction for the Health premium paid under Section 80D. Up to Rs 15,000 a year is deductible from your taxable income if you buy a health insurance policy for your parents. If the parents are senior citizens, the deduction is even higher at Rs 20,000. This exemption is over and above exemption for your own health premium.

Image courtesy of Ambro at FreeDigitalPhotos.net

(Republished with amendments)

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39 Responses to “Your parents can help you save tax / reduce your tax liability”

  1. James says:

    Hello,

    My annual income falls in the 30% tax slab.
    Can i reduce my taxable income by gifting some amount to my spouse. If so, what is the limit?

  2. Chaitanya says:

    My parents are senior citizen and they are depending on me, i mean they are not in tax payers band. My question is that if i gifted money (say l lakhs) to my parents and they deposited the money in their names in bank, then is it possible to show it in 80C section for me to show as an investment?

  3. S Sudarshana says:

    This has removed the misconception that any money given to family and their returns by way of interest etc, will be clubbed with the person who donated or gifted. The difference between giving to wife/children and giving to parents is clearly differentiated to get maiximum tax rebate as also making the parents richer!

  4. BIBHUDATTA SARANGI says:

    Excellent Topic. Keep it up

  5. s sudarshana says:

    Mr.Debanjan: If you want to say tax on your returns of FDs etc, (i) gift the fund to either or both parents vide cheque or cash and (ii) let them deposit in FDs in their name (1st name) and jointly with you as 2nd person or you as a nominee (iii) and the returns by way of interest will not be clubbed with you as they will be getting the interest. If you become the 1st named person either from your account or from his/her (parent) source account, you will be liable to pay tax.

  6. s sudarshana says:

    Mr.Srinivas,
    If you have enough and want to invest in PPF due to it’s unique features you cannot do more than 1.5 lakhs in a financial year. Then you can transfer the funds to either or both parents and get the money deposited in PPF.

  7. Debanjan says:

    Hi!
    I want to transfer my money to my mom’s account which is a single account & that money we will invest as FD (conjointly with me & my mom).
    In that case, will it be a problem for me to transfer or pay out the interest for my mom?

  8. srinivas says:

    i am unable to understand how money invetsed in PPf of parents will help in reducing my tax liability.
    i am caliming exemption of 80 c of Rs 1.5 lacs under various head includimng my PPF . will i get additional benefit i invest in ppf account of may parents .pl explain in detail

  9. s sudarshana says:

    Mr.Naveen,it is a ptp! Point to ponder!! If I get the info I will submit my comment.

  10. Epifania says:

    Can you tell us more about this? I’d want to find out some additional information.

  11. Naveen says:

    If Father stays in a Rented property with a right to give on rent further if he wish to his family members only , then in that case can son pay rent to his father.
    The Rental Income to Father will be business Income or Income from House property – kindly suggest.

  12. S Sudarshana says:

    Mr.J.Udaipuria:As the property is financed wholly by yout father, even if you pay the rent to your mother, that is taxable in the hands of your father.

  13. J. Udaipuria says:

    IN CASE IF PROPERTY IS IN JOINT NAMES OF PARENTS AND WHOLE CONTRIBUTION HAS BEEN PAID BY THE HUSBAND – CAN SON MAKE RENT PAYMENT IN THE NAME OF MOTHER ? PLEASE REPLY.

  14. S Sudarshana says:

    Mr Shashikanth Giri: For claimnig exemption for House Rent paid you must be receiving HRA from your employer. Many of the private companies will give the choice to the employees to fix the breakup of the CTC (cost to company)in which case you can optimise the benefits.
    2. Regarding gifting to wife. You can gift any amount to her but the income generated from that gift will have to be accounted as your income and pay tax.

  15. S Sudarshana says:

    Mr.Saurabh: How can there be a a tax (income tax) on money paid to parents. There is no expenditrue tax as of now. 2ndly proof of the owner. He is in possession of the house you are staying. IT dept will not break it head as long as the money received by him is accounted towards tax by him.

  16. S Sudarshana says:

    Mr.J.Udaipuria: As the property is not owned by him (but by your parents) you cannot claim relief u/s 24B.

  17. S Sudarshana says:

    Mr.Naveen Rishi: Yes. If your wife has purchaed the house with her income/money she can collect the rent form you. When you get the exemption towards HRA, she can get the exemption u/s 24B.

  18. S Sudarshana says:

    Sunoj: Yes you can get HRA exempt The rent paid to your parents is to be shown as income by him and pay taxes if he is in tax bracket. Your parnets can stay in your house.

  19. S Sudarshana says:

    Mr Hari, (1) You can claim relief u/s 24B if you are getting some rent or self occupied the house in Hyderabad. Get a rent (at can be anything other than zero) from your sister and claim full relief u/s 24B. (2) You can get HRA exempt (provided you are getting HRA, paying rent above 10% of your basic salary, etc)

  20. Hari says:

    Sir,
    Very good one, most help full, thanks a lot

    Kindly guid me if i am paying homeloan taken by me but residing by my sister’s family in hyderabad, home loan emi 11015/- per month.
    i am working in bangalore my house rend is paying by my employer directly to house owner’s Bank account.

    shall i claim HRA Exemptin

    Please reply
    Thnaks and Regards
    HARI

  21. SUNOJ says:

    SIR MY PARENTS HAVING ONLY ONE HOUSE , WE ALL ARE STAYING IN THAT HOUSE. IF I PAY RENT OF Rs 5000/PM, TO MY FATHER, CAN I GET THE TAX BENEFITS FOR THAT AMOUNT (HRA EXEMPTION).

    Any condition for getting HRA Exemption for Rent paid to parent (Staying together)

  22. Rajeev says:

    Good one

  23. Naveen Rishi says:

    Dear Sandeep,

    I presume that going by your logic and in case the property has been purchased by the wife out of her own sources (sale of jewellery, shares, etc.), the husband can pay HRA to his wife and claim the HRA benefit and the wife can claim the standard deduction on rent received including interest paid on housing loan.

    Naveen Rishi

  24. Sankirtan says:

    The article does not cover the aspect when either of the parent expires and the funds come back to the nominee, that when the some kind of tax is applied.

  25. J. Udaipuria says:

    Sir, I have asked so many people one question but no satisfactory answer was received.
    The question is –
    1) The house/flat is registered in the names of husband & wife,
    2) The contribution for flat purchased was made fully by husband,
    3) Though name of wife is registered, no contribution was made from his a/c,
    4) Now – can a son pay rent in the name of mother who hold no income, and father is still employed and working.

  26. Anshuman Singh says:

    This information is very nice & helpful & provided at right time of march start so that we can plan things accordingly..

  27. Saurabh says:

    Hi
    Can u guid me to note some section references, wherby its evident that money paid to parents is not taxable.

    One more query is it compulsory that landlord must be a legal owner of the property where he resides, as no landlord would be ready to show doc in that regard, He had only shown his return reflecting the rental income received from me.

    Many thanks in advance for your kind guidance.

  28. devaki reddy says:

    wow… nice article.its a cool idea

  29. devaki reddy says:

    wow… nice article.

  30. Shashikant Giri says:

    Respected sir,

    I am one of the salary person staying in Mumbai, would like to ask you that can i get HRA benefits (which iam paying to my parents) even if Iam not getting the same allowance in my salary. Secondly for tax saving purpose can i give some amount as a Gift from my salary income to my wife.

    Sir your valuable advice help me out from big probelm.

  31. Vivek says:

    One can also save tax by way of renting the house property to parents and recovering rent from them in case if you have a housing loan against the said property and claim a set off of loss from such income from house property from the Income from salaries.

  32. Manjunatha.K says:

    Very Help full this is but i have one confuse in the first point,,,,
    if suppose my total income Rs.35,00,000 in that i gave to Rs.28,00,000 to my parents for the purpose of invest in tax saving,,, in this where i show in IT Return of Rs.28,00,000… pls help

  33. Pawan says:

    hi,

    very good article…..but can someone guide me how can I prove and get tax exemption for the money invested in senior citizen bank deposit on my father’s name……I checked for this in State Bank of India, however, the branch manager told me that this can not be done … :( :( :( :( pls help me to know what procedure I will need to follow……

  34. Puneet says:

    If the money is gifted to parents then income earned from that investment is our income or their income only??
    And clubbing provision will apply or not?

  35. Rajendra says:

    My parents sold their old house and constructing new house which is in their name. My parents has asked me for some money to help them in constructing their house and i also want to help. My question is ,can i get tax exemption on this money which i will be giving to my parents?if yes, how can i claim that?

    Regards,.
    Rajendra

  36. Tom M. says:

    Great information! I never knew these kinds of tax saving options exists!  There are few more like infrastructure bonds etc to save tax above the one lakh limit,

  37. Richard - Camden CA says:

    Every individual especially the salaried shall really consider the opportunities to save tax because it is observed that individuals (often salaried ones) end up paying more taxes than they are obligated to.

  38. Raj says:

    The age limit for senior Citizen now is 60 years. This is outdated Article, The PPF limit since Dec 2011 has been raised to 1 Lac, And why invest 15 Lacs in Senior Citizen Bank Deposit  @ 9%, when you can get around 10% in other Deposits and income interest of both are taxable. 
    Investments in debt & Mutual funds are not mentioned. The dividends of these are not taxable

  39. Sivaram says:

    Excellent, the person who drafted should be a highly qualified. The information, which he provided in this, will be very usual. I appreciate and thank for his wonderful contribution.

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