• Mar
  • 01
  • 2014

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

Posted In Income Tax | , | 18 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.

1 Buy House in Parents name if they are in a lower Income tax bracket

Every adult enjoys a basic tax exemption limit. For senior citizens (above 60 years), the basic exemption limit is Rs 2.5 lakh a year. 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.

There is no tax on such gifts and the income from the investments will be treated as theirs. There are plenty of options. The Senior Citizen’s Savings Scheme offers an attractive 9.25% per annum. But the income is taxable and the investor must be over 55 years.

Here’s how you go about it. Income tax deductions allow senior citizens a tax-free income of Rs 2.5 lakh. To exhaust this limit, say you gift Rs 28 lakh to each parent in cash. Of this, both can individually put Rs 15 lakh in a 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 1.4 lakh.

If they invest the remaining Rs 13 lakh each in the State Bank of India’s (SBI) fixed deposit (FD) of eight-years (at an interest rate of 7.5 per cent) that pays interest each quarter, it will fetch them an income of nearly Rs 1 lakh annually.

That means both parents have earned Rs 2.8 lakh from the senior citizen saving scheme and another Rs 2 lakh from SBI’s five-year deposits each year. A total savings of Rs 4.8 lakh – the tax-free limit (Rs 2.5 lakh) that each parent enjoys. So, they don’t even need to file tax returns.

The Public Provident Fund offers tax-free income but there is a limit of Rs 1,00,000 a year. Invest in your parents’ names if your own limit is exhausted. 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.

This strategy won’t work in the case of your spouse or minor children. Any amount given to a spouse is tax free but if it’s invested, the income is treated as that of the giver. Similarly, income from investments in a minor child’s name is added to the income of the parent who earns more and is taxed accordingly. No such clubbing provisions come into play when money is transferred to a parent. There is also no limit on the amount you can give to your parents.

2 Pay them rent if you live in their house

Do you live in your parents’ house? You can pay them rent to claim House Rent Allowance exemption. This is possible only if the property is registered in the name of your parent. The owner will be taxed for the rental income after a 30% deduction. So, if you pay your father a rent of Rs 3 lakh a year (Rs 25,000 a month), he will be taxed for only Rs 2.1 lakh.

It gets better if the property is jointly owned by both parents. Then you can divide the rent two-ways 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.

3 Sell them shares and offset losses

Tax laws allow you to adjust short-term losses from stocks against certain gains. But what if you have been holding junk stocks in your portfolio for more than a year? If you ask your broker to sell them, you won’t be able to adjust the long-term capital losses against any gain.

However, if you sell them through an off-market transaction where no securities transaction tax is paid, you are not only allowed to adjust the loss against a gain, but also carry forward the unadjusted loss for up to eight financial years. That’s easier said than done. It’s already tough finding buyers for junk stocks on the exchanges. Finding one for a private deal is infinitely more difficult.

It’s here where your parents can help you. Sell the junk stocks to them in an off-market transaction. An off-market transaction is a private deal between the buyer and seller without the exchange as an intermediary. The losses you book can then be adjusted against capital gains from other assets such as property, gold, debt funds, etc. It can also be carried forward for up to eight financial years. Keep a few things in mind while you go about this. The sale should be at the market price of the shares and the buyer should pay the sum by cheque. Otherwise, the taxman might treat the transfer as a gift.

4 Buy them a health insurance policy

This is the simplest and most commonly used strategy to save tax through your parents. Buy a health insurance policy for them and get deduction for the 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 deduction is over and above the Rs 15,000 that one can claim as deduction for the health insurance premium paid for himself and his family (spouse and children). Also, this deduction is available irrespective of whether parents are financially dependent on the taxpayer or not.

(Republished with amendments)


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

  1. Rajeev says:

    Good one

  2. 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

  3. 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.

  4. 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.

  5. Anshuman Singh says:

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

  6. 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.

  7. devaki reddy says:

    wow… nice article.its a cool idea

  8. devaki reddy says:

    wow… nice article.

  9. 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.

  10. 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.

  11. 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

  12. 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……

  13. 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?

  14. 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

  15. 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,

  16. 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.

  17. 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

  18. 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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