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.
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.
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.
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.
Buy them a health insurance policy