Since inception of birth, your mom and dad are always there to protect you, even if you feel independent. Now, thanks to your parents, they will be again there to help you indirectly by letting you save more tax. They can bring down your tax liability in various ways, provided they are in a lower tax bracket or already retired. If your mom or dad falls in lower tax bracket, you can invest money on their name to save more income tax. It is not just income tax, but you may even earn higher interest as interest rate for senior citizens is usually more.

 

There are different ways by which you can save income tax by involving your parents directly or indirectly.

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The following Simple Smart Strategies which can reduce your tax outgo.

  • Gift money to your parents and Save tax on  Future Income

Do you have already been in higher tax bracket and have some surplus cash that you intend to invest. Maybe, you can think of an indirect method of investing (that is not in your own name), and save some tax on the income. You can take a slightly circuitous route on investments for better mileage. One way of saving on taxes is to gift your parents assets and cash for investments.

Let’s assume that your parents are senior citizens (above 60) and having no income or lower income. You can gift them any amount of cash for investing in high-return instruments such as senior citizen’s savings scheme without attracting gift-tax and as their money will become theirs any income arising out of it would be treated as their income, Not yours.

As senior citizens do not have to pay any tax for annual income up to Rs2.5 lakh and eligible another deduction of Rs1 lakh under section 80C. So the interest income does not become taxable unless it exceeds this exemption limit plus investing up to under section 80C. This means you can invest up to Rs 36 lakh through each of your senior mom and dad without any source of income.

Of this, both can individually put Rs 15 lakh in a senior citizens savings scheme that earns a return of 9 per cent and pays interest every quarter and eligible under section 80C. Each will get yearly interest of nearly Rs1.4 lakh.

If they invest the remaining Rs 21 lakh each in the Bank fixed deposit (FD) at an interest rate of 9.5 per cent that pays interest each quarter, it will fetch them an income of nearly Rs2.07 lakh annually.

That means both parents have earned Rs2.8 lakh from the senior citizen saving scheme and another Rs4.14 lakh from Bank fixed deposits each year. A total savings of Rs6.94 lakh – the tax-free and section 80C limit (Rs 2.5 lakh+ Rs1 lakh) that each parent enjoys. So, they don’t even need to file tax returns. Imagine this, if you had invested the same amount in your own name and assuming you are in the highest 30% tax bracket, you would have to pay taxes to the tune of Rs2.14 lakh approximately.

That’s a big amount saved and the benefit can be more in case of your parents come under the category of Super Senior Citizen (more than 80 years of age) who enjoy tax-free income up to Rs5 lakh per annuam.

However, this strategy won’t work in the case of your spouse or minor children because of clubbing provisions under section 64 would apply on them.

  • Living in parents’ house and pay them rent

You can surely avail HRA exemption if you live with your parents. You can pay rent to them, but remember rent received will be taxable for your parents and the property must be registered on their name. So, if your parents fall in lower tax bracket, it will surely be helpful for you to save some tax. Your parents will be taxed for the rental income after a 30% deduction. So, if you pay your father a rent of Rs3 lakh a year (Rs 25,000 a month), he will be taxed for only Rs2.1 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 junk shares and  offset losses

As you know that 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? You cannot offset long term capital losses with long term gains or short term gains, so it is a complete loss of money. But if you will involve your parents, they can help you offset these long term losses against a gain from other assets such as property, debt funds, etc. and carry forward unadjusted loss for up to 8 financial years.

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. 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 a health policy for them

This is the simplest and most commonly used strategy to save tax through your parents. Buy a health policy for them and get deduction for the premium paid under Section 80D, up to Rs. 15000 from your taxable income. If the parents are senior citizens, the deduction is even higher to Rs. 20000.

This deduction is over and above of Rs. 15000 that one can claim as deduction for the health insurance premium paid for himself and his family (spouse and children). This deduction is available irrespective of whether parents are financially dependent on the taxpayer or not. But it should not keep you from buying a health insurance cover for your parents. After all, they looked after your needs when you were a child. Now it is time you repay that debt.

Above are the few ways to save more income tax by involving your mom and dad. So, never overlook your parents, they will always be helpful throughout your life.

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Suresh Kumar Narula

SEBI Investment Advisor, Founder & Principal Financial Planner at Prudent Financial Planners
Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in
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