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Tax Planning ideas through your family

Following are the Nine Tax Planning ideas through your family that can help you lower your income tax paid to the Government. If you need any assistance with tax planning in general or for any specific topic below then you may get in touch here - Appointment with CA.

1. Paying residential house rent to Parents: Section 10 (13A) of the Act allows exemption of any house rent paid through electronic means to anyone owning a residential house, even if it is paid to the family members. The rent should be paid to the parent under whose name the house is registered to avail the benefit, if the rental income is shown as taxable in the hands of the parent receiving the rent. It would thus be suggested that the rent is paid to the parent earning lesser income and/or registering a house property in name of the parent earning lesser taxable income. This would help decrease the tax liability and rental income being taxable in the hands of a parent who has lower taxable income.

 2. Children’s educational expenses: Section 80C of the Act allows a no-limit deduction of the school tuition fee paid for own children. In addition, Section 80E allows deduction of fees of higher education of two children. The tax benefit could be claimed by either the parent or the child (student), depending on who repays the education loan to start claiming this deduction, since it is important as to who repays the loan. Section 80E tax deduction is available only on taking an education loan from financial institutions and not from family members or friends and relatives. Taxpayers can claim the deduction for the maximum period of earlier of either - period from the start of year of repayment of the interest on the education loan or seven immediately succeeding financial years. For example: If loan repaid in 5 years, then deduction only for 5 years, but if loan repaid for 10 years, then deduction only till 7 years. This allows the individual to save taxes as well as provide best education for his children without worries.
 3. Medical Health Insurance: In consonance with the amendments as per Finance Act 2020, Section 80D of the Act allows deduction of any medical health insurance premium for self, wife and kids up to INR 25,000 as well as a deduction of up to INR 50,000 for parents who are senior citizens, in addition to INR 5,000 for preventive health check-up. This is one of the most essential and important deductions since, given the new levels of uncertainty, post the COVID crisis specifically, it is both important and useful to take a health insurance policy, to be covered in these uncertain times. In fact, to promote this, most of the new policies are covering COVID tests and treatments in their insurance policy thus making it even more necessary to buy one.

4. Gifts: As per amended Income Tax Rules pertaining to Gift tax, Gifts from specified relatives, i.e. spouse, father, mother, brother and sister, lineal ascendant (son, grandson, great grandson) or descendant (father, grandfather, great grandfather) of the individual or his spouse as well as brother/sister of the spouse are exempted, regardless of amount. However, it is notable that even though the gift is exempt in the hands of the recipient, the income generated from that gift (Interest, dividends earned by investing the gift) may be taxable under the clubbing (addition) of income provisions of the Income Tax Act in the hands of the person giving the gift.

For instance, if Mr. X gifts Rs 20 lakhs to his wife, the same would not be added to the income of his wife. However, if MR. X’s wife invests the gift in an interest-earning Fixed Deposit, then the interest would be added to the income of Mr.X.

5. Invest through your spouse: Gift some money to a non-earning spouse and invest that in a tax-free instrument. There is no upper limit to the amount you can give as your spouse is in the list of specified relatives whom you can gift any sum without attracting a gift tax. However, the taxman is not foolish. If you invest the gifted money, the Section 64 of the Income Tax Act, a provision for clubbing income, comes into play. Therefore, the escape route is by investing in a tax-free option such as a PPF or ELSS scheme.

Also, there is no tax on long-term gains from shares and equity mutual funds. So, if you invest in them in your spouse name and then hold for more than a year, there will be no additional tax liability. What's more? When you re-invested these earnings from the investment, it will be considered the spouse income and you'll have no further tax liability on that money. You can use this strategy even if your spouse is earning, but falls in a lower tax bracket.

Similarly, you can also invest in your parent's name and the best part is the clubbing rule won't be applicable here. Also, there is no gift tax on the money you give to your parents. So make use of their a basic tax exemption limit—Rs 2 lakh for up to 60 years, Rs 2.5 lakh for people above 60 and Rs 5 lakh if they are above 80 years of age. In case, they are exceeding the exemption limit, help them save taxes by investing in a tax-free option.

6. Loan money to spouse: Another way to avoid tax is by showing the monetary transaction as loan. So, for instance, if you buy a house in your wife's name or transfer the second property to her, the rental income from it will not be treated as your income if she pays you a nominal interest on the loan. She can also transfer her jewellery worth the value of the property in your favour. Then also the rental income from that house would not be taxable to you.

Even your fiancée (or, fiancé) can help you save taxes. If a couple is engaged, and the one of them does not have any taxable income or pays tax at a lower rate, her fiancé can transfer money to her. The income from those assets won't be included in his income because the transaction took place before they got married. One can give up to Rs 2 lakh (the tax exempt limit) without putting any tax liability on the partner.

7. Children can help as well: You must be already claiming a deduction for the education fee of your children. You can also gift your minor child some cash. But if you plan to invest that amount, the income will be clubbed with that of the parent who earns more.

To avoid clubbing of your child's income, you may invest in tax free instruments such as PPF, mutual fund (MF) or ULIP. Open a minor PPF account in the name of your child and it won't be taxable. However, there is a limitation to this option—the contribution to your own PPF account and that of the child cannot exceed the overall limit of Rs 1 lakh a year.

You can buy a child plan from an insurance company or invest in an MF. The premium paid (or investment made, in case of MFs) by you for your child's future qualifies for a deduction under Section 80C of the Income Tax Act, 1961. A private trust for your child can also be created to save tax.

There is also a small deduction available in case that investment earns you some money. You can claim up to Rs 1,500 exemption per child per year for a maximum of two children. This means you can invest Rs 15,000 (or, Rs 30,000, if you have two children) in a one-year fixed deposit scheme which gives an annual return of 10%, and be exempt from tax.

8. Adult children can be big tax saver: The clubbing rule does not apply once the child turns 18 and the person will be treated as a separate individual for all tax purposes. This means, you can transfer money to a major child and have another 2 lakh exemption limit along all the exemptions and deductions any other taxpayer enjoys. So you can freely gift him any amount of money and invest it for tax-free gains. Your PPF limit also increases by another lakh. You should also transfer all investments made for the child's future—deposits and investments—in major child name. You can also invest if the child is 17 and will turn 18 before 31 March of that year and get the benefit for the entire year.

9. Family can help set off long-term equity losses: The tax rules allow you to adjust short-term losses (held for less than a year) from equities against gains. But long-term losses on which the securities transaction tax (STT) has been paid cannot be adjusted against any income. However, if you haven't paid the STT yet, then the sore lemons that have been lying in your portfolio for more than a year can be set off. These long-term losses can be adjusted if you transact outside the exchanges at the existing market rate with simultaneous delivery to the buyer.

The problem is finding a buyer offline and here your family comes in. Selling the equity investment to a family member can help you book a long-term equity loss by without paying STT and can be adjustment with long-term gains. The sale should be at the market price and the transaction by cheque to avoid confusion. Otherwise the transfer within the family might be treated as a gift.