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
a. 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.
(Republished with amendments)