Invest via your parents/children and save tax :

With the July 31 deadline nearing for filing tax return, we rush to invest in the conventional options to save on tax.  Investing under S/80C and claiming medical expenses and house rent allowance are some common modes of saving tax.The human tendency to procrastinate till the end hour in filing returns does not allow us to explore some not so common options for tax planning.

For instance, have you pondered that by investing in your parents and children’s name, you can broad base your income and reduce your tax incidence. If you are investing directly in your name, your tax liability will increase and might push you in the highest tax bracket.  Taking an indirect route by gifting your parents and major children money and assets for investment is the simplest way to save on taxes.

As per the Indian tax laws, gift received (in cash or kind) from relatives do not attract any tax. Relatives here include spouse of the individual, siblings, brothers and sisters of the spouse, brothers and sisters of the parents and any lineal ascendant or descendant of the individual or the spouse. Though gifts are not taxable in the hands of the recipient, any income generated from the gift attracts taxation. However, income generated from the gift given to spouse and minor children is clubbed in the total income of the donor.  For instance, you transfer Rs.1 lakh to your spouse or minor children and it is invested in a fixed deposit yielding 9 per cent per annum. The yearly interest of Rs.9,000 will be clubbed in your total income for the purpose of taxation.

If you want this interest earned to be treated as independent income, then you can invest the surplus money or assets in the name of your parents and/or major children. If your parents are above the age of 60, they do not have to pay annual income upto Rs.2.5 lakh each. Assuming they don’t have any other source of income, you can invest up to Rs.50 lakh ( upto Rs.25 lakh each) through your senior parents and earn a tax free income of Rs.5 lakh (assuming a 10 per cent annual return).

Similary, if your parents are above the age of 80, they are entitled to a basic exemption limit (BEL) of Rs.5 lakh, each. So you can invest up to Rs.1 crore (upto Rs.50 lakh each) in their name and indirectly earn a tax free income of Rs.10 lakh.

Investing in your children’s name is also simple if they are major in age and not earning. In the case of daughter, interest income earned from your gifted money will not attract tax until it crosses the BEL of Rs.1.9 lakh. Similarly, annual interest earned through your son will not be taxable until it exceeds Rs.1.8 lakh. 

This prudent mode of gifting money or assets to reduce taxes also helps in making your family secure in the case of some unfortunate event. However, one hitch in this strategy is that you may be uncomfortable gifting a lot of money to your major children. As you will be giving money on mutual trust, be sure that the recipient does not take advantage of it. So start planning your taxes from the current financial year by making the most of the gifting provisions.