Sure, it’s an investor’s duty to pay their taxes in full and in a timely manner, but they also have an option to save on tax. Nobody likes the extra influx of cash from their pockets. The government encourages individuals to invest in tax-saving investments by offering them tax benefits in form of tax deductions and exemption. These tax deductions and exemptions can help an investor to save money for a rainy day.
When it comes to tax saving, most investors are well-versed with the deductions under section 80C of the Income Tax Act, 1961. To refresh your memory, several tax-saving investments such as tax saving mutual funds – ELSS (Equity Linked Savings Scheme), Public Provident Fund (PPF), Senior Citizen Savings Scheme (SCSS), National Pension Scheme (NPS), Bank Fixed Deposits (FD), Unit-Linked Insurance Plan (ULIP), Employee Provident Fund (EPF) and National Savings Certificate (NSC) offer tax deductions of up to Rs 1.5 lac. Note that, the tax deduction of up to Rs 1.5 lac is offered to all the investments u/s 80C and not individual investment options. However, did you know that your family members can help you save on tax too? This article explains four ways how your family members can lower your taxable income.
There are several ways through investing, gifting, or saving your family members (parents, spouse, or children) you can avail of certain tax deductions. Following are four such ways:
1. Loan – If your spouse invests the money gifted by you in tax-saving investment such as PPF, the interest income will be exempt from tax.
2. Child’s education – Opting for an education loan for your child makes you eligible for tax deductions on repayment of interest for up to eight years under Section 80E of the IT Act. You can also gift an interest-free loan to your child to diminish their tax outgo.
3. Investing on behalf of your family – Certain investments such as mutual funds, PPFs, insurance plans, ULIPs, etc made on behalf of children are eligible for tax deductions. However, one must be mindful that the income will be clubbed with their total taxable income and taxed accordingly. To avoid this, you can make investments in ELSS tax saving mutual funds or tax-free ULIPs if the gains accrued are lesser than Rs 1 lac per annum. If you open a savings account for your child, then interest income of up to Rs 1500 per child (for up to 2 children) is exempted from tax u/s 10(32).
4. Paying rents to parents – If an individual pays rent to their parents, they can avail tax deduction for the same. However, investors must produce bank statements of the payments, rental agreement, and intimation of housing society is mandatory in such a case.
Whether you decide to invest in mutual funds or not, make sure that your investments align with your investment portfolio. Happy investing!