Well most of us look into alternate ways to save the amount of tax we pay to the government. We search through exemptions and rebates. But have you ever thought your family members can help you in saving taxes. Yes there are certain exemptions in tax rules through which you can gain exemption over the money you spend for them. However there are rules and regulations governing them so make sure you read through it with attention.
Pay rent to your parents
When you stay with your parents, you can pay rent to them and gain tax exemption under house rent allowance. However the property should be owned by your parents. If your parents are earning income of their own the rent will be included along with it and it will be taxed, they can declare 30 percent of the tax you pay as maintenance expenditure and include the rest. But if your parents do not have any other source of income and if the rent is below the threshold levels of taxing there is no question of tax payment. INR 2.5 lakhs is the threshold limit for citizens under the age of 60, INR 3 lakhs for citizens in the age group of 60 to 80 and INR 5 lakhs for senior citizens over the age of 80.
You can receive gift from family members and you need not pay tax for the money you received. Well only if you are related in one among the below listed way, you can gain this benefit:
• Brother or sister
• Brother in-law or sister in-law
• Lineal ascendants or descendants of the person gifting you
• Lineal ascendant or descendant of the gifting persons spouse
• Spouse of the people listed above
The benefit for the person who is on the receiving end of the gift is you don’t need pay tax over this amount. Similarly an amount of up to INR 50,000 you receive from friend, a person who you are not related to in the above mentioned ways, will not be taxed. Any amount over INR 50,000 will taxed. For example if you get INR 60,000 per year from your friend it will be taxed completely not just the additional INR 10,000.
The best part of wedding is not getting hitched to your soul mate but receiving gift. Yes you read it right, even if your receive INR 1 crore as wedding gift you need not pay taxes over that amount. However if you re-invest that amount in FDs and earn interest it will be subject to income and taxed.
So here is the list of advantages for the person who is giving the gift:
Let’s assume you are gifting your parents or parent-in-laws
When you gift them it does not mean the money you give to them will not be taxed. You earn 15 lakhs and give your parents 5 lakhs the total 15 lakhs is taxable amount. You may feel what is the advantage of gifting? Here comes the advantage part, if you invest these 5 lakhs in fixed deposits and gain interest amount over this will also become a part of your income and gets taxed. So if you’re gaining 1 lakh over your fixed deposits, your total income will be considered as 16 lakhs. In turn if your parents receive the gift and invest in fixed deposits and earn 1 lakh, your income will be considered as 15 lakhs.
If your parents earn income more than the taxable threshold limit they will pay taxes over the earned interest from your gift. As mentioned earlier tax thresholds apply.
Let’s assume that you are gifting your spouse
Now you give your spouse INR 5 lakhs and he or she earn INR 50,000 as interest through fixed deposit over that, the interest will be clubbed into your income and you will end up paying taxes for the same 15.5 lakhs. So you see there is no advantage in doing so. However if your spouse invests this gift in tax exempt streams like ELSS mutual fund, shares of listed company etc the money earned through it will not be taxes
Another alternative to avoid taxes is if your spouse invests the 50,000 earned as interest through the FD into another FD and gains 5,000 it will be considered as the spouse’s income and will not be clubbed with gift givers income.
If you give your children who have attained the age of 18 and do not earn or earn income which falls under the lower tax slab of yours, you can gift them as much as you want. The interest that is made out of that will be taxed under their name and will not be clubbed into your income.
However income earned by your minor child will be clubbed into the income of parent who is earning the highest. If you’re minor child earns 50,000 and if one of the parent earns INR 5 lakhs and the other INR 6 lakhs. The parent earning 6 lakh will have to pay tax for INR 6.5 lakhs adding the minor child’s income.
Note: Gift money will always be considered as a part of your income and only the investment returns earned through it will not be added with slight variations in clubbing based on who you give the gift. This is logical because one can declare their entire income as being gifted and pay no tax.
Will or inheritance
You need not pay tax over the money you receive through will or inheritance. There is no limit to the amount you have received.
Tax on properties
If the property is gifted without consideration only the stamp deal value is taken up and property value is not added.
Buy health insurance for family
A Health insurance for the entire family will save you INR 40,000 under the section 80 D. irrespective of whether the parents are financially dependent or not on the tax payer.
Claim a deduction for the education fee of your child under section 80 C. A maximum deduction of up to INR 1.5 lakh is permitted. Following payments come under education expenses:
• Pre-nursery fees
• Nursery fees
• School fess
• University or college fees
Though when you are busy calculating on how much you save by gifting to your family member remember to have clear transactions for all of them. Maintain clear bank statements. If you have trouble sorting them out reach for an accountant’s assistance. In case you’re scrutinized by tax men you should be in a position to justify.
Anand Rajendran, CEO of Uptra Consultancy Services , a leading provider of legal services, including company registration. He is the Head of Communications at Uptra Consultancy Services, India’s largest online legal services facilitator.
By: Anand Rajendran