 "Want tax benefits? Your relatives can be of help")
Over the next two weeks, the tax season for FY14 will come to an end. But if you are still fretting over having to pay high taxes, you have a way out. You could use members of your family - parents, children and spouse - for some additional deductions. Not all investments and spending for the family are eligible for tax rebates. However, there are some ways to save you high taxes. Here's how:
Buy health insurance for the family: Given that it's a necessity, the earlier you buy a medical insurance, the better. If you buy it only for yourself, you can save up to Rs 15,000 a year. But if you buy a policy for your parent, you can get an additional deduction of Rs 20,000 a year per parent under Section 80D.
"Benefit under Section 80D can be claimed for payment of premium towards health insurance for self, spouse, children and parents. You can claim deductions of up to Rs 15,000 for premium payment for self, spouse and kids and up to Rs 20,000 for senior citizen parent(s)," explains Amarpal Chadha, tax partner at EY.
In children/wife's name: Most individuals with school-going kids anyway claim deduction for paying education fee. You can also invest in your child's name or even in your spouse's name. However, interest earned on investments made in a child's name is clubbed with that of the parent who earns more - either the father or the mother, under Section 64.
"To avoid clubbing of your child's income, you may invest in instruments where the interest income is exempt from tax. Like Public Provident Fund (PPF), equity mutual funds or life insurance - term and investment policy," says Kuldip Kumar, executive director (tax & regulatory services) at PricewaterhouseCoopers. There is a limitation to this option, though, that the contribution to your own PPF account and that of the child cannot exceed the overall limit of Rs 1 lakh a year.
"However, if you reinvest the interest income earned from investments made in a relative's name, then the returns earned are not clubbed to your income as it is considered the relative's income (child/wife)," adds Kumar. You can use this strategy even if your spouse is earning but falls in a lower tax bracket.
Additionally, you can invest Rs 15,000 per child (for up to two children) in a one-year fixed deposit scheme, which returns 10 per cent annually and be exempted from tax.
Major children help save more: Section 64 does not apply to investments in the name of children who are above 18 years. Such children are treated as a separate taxpayer. You can transfer money to a major child and avail tax exemption of Rs 2 lakh or the basic exemption limit applicable to the child. So, you can freely gift him any amount of money and invest it for tax-free instruments. In this case, the PPF limit increases by another Rs 1 lakh. You can also invest on behalf of a child who is under 18 years, if s/he will turn 18 before the financial year ends.
Lend to your spouse: Instead of gifting money to your spouse for investment, consider lending to your better half for buying a property. As long as s/he pays interest to you for the loan (even if it is nominal), the rental income from this property will be taxable in his/her hands, not yours. On the other hand, if you buy a house in your spouse's name or transfer the second property to his or her name, it will be taxable in your hand. Instead of paying interest for the loan, your spouse can also transfer jewellery or any other asset which is worth equal to the property cost. In this case too, rental income will not be taxable.
One can give up to Rs 2 lakh (the tax exempt limit) without putting any tax liability on the partner.
Pay rent to your parents: If you live with your parents and pay them rent, you can claim that amount. "However, your parents will be taxed on this. Therefore, there are a few criteria for making such a claim. The house should be registered in parents' name and the parents should also show the amount as their rental income," says Chadha.
To lower their tax on this rental income, your parents can claim a flat 30 per cent of the annual rent as deduction for house maintenance expenses. Or, invest in Section 80C instruments such as the Senior Citizens Saving Scheme or five-year bank fixed deposits. Say you pay a rent of Rs 30,000 a month, or Rs 3.60 lakh a year.
Assuming your parents are senior citizens, their basic exemption limit is Rs 2.50 lakh. Which means, their taxable income is Rs 1.10 lakh, which can be invested to cut out on tax liability. Here, we are also assuming the parents earn solely through rental income, which may not be the case for interest income on bank deposit also qualifies as income.
Buy health insurance for the family: Given that it's a necessity, the earlier you buy a medical insurance, the better. If you buy it only for yourself, you can save up to Rs 15,000 a year. But if you buy a policy for your parent, you can get an additional deduction of Rs 20,000 a year per parent under Section 80D.
"Benefit under Section 80D can be claimed for payment of premium towards health insurance for self, spouse, children and parents. You can claim deductions of up to Rs 15,000 for premium payment for self, spouse and kids and up to Rs 20,000 for senior citizen parent(s)," explains Amarpal Chadha, tax partner at EY.
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If your parents are not senior citizens, you can claim up to Rs 15,000 for premium payments for their health cover. This deduction is available irrespective of whether the parents are financially dependent or not. In case of a married couple, the husband can claim for premium payment for his parents and the wife can claim for her own parents.
In children/wife's name: Most individuals with school-going kids anyway claim deduction for paying education fee. You can also invest in your child's name or even in your spouse's name. However, interest earned on investments made in a child's name is clubbed with that of the parent who earns more - either the father or the mother, under Section 64.
"To avoid clubbing of your child's income, you may invest in instruments where the interest income is exempt from tax. Like Public Provident Fund (PPF), equity mutual funds or life insurance - term and investment policy," says Kuldip Kumar, executive director (tax & regulatory services) at PricewaterhouseCoopers. There is a limitation to this option, though, that the contribution to your own PPF account and that of the child cannot exceed the overall limit of Rs 1 lakh a year.
"However, if you reinvest the interest income earned from investments made in a relative's name, then the returns earned are not clubbed to your income as it is considered the relative's income (child/wife)," adds Kumar. You can use this strategy even if your spouse is earning but falls in a lower tax bracket.
Additionally, you can invest Rs 15,000 per child (for up to two children) in a one-year fixed deposit scheme, which returns 10 per cent annually and be exempted from tax.
Major children help save more: Section 64 does not apply to investments in the name of children who are above 18 years. Such children are treated as a separate taxpayer. You can transfer money to a major child and avail tax exemption of Rs 2 lakh or the basic exemption limit applicable to the child. So, you can freely gift him any amount of money and invest it for tax-free instruments. In this case, the PPF limit increases by another Rs 1 lakh. You can also invest on behalf of a child who is under 18 years, if s/he will turn 18 before the financial year ends.
Lend to your spouse: Instead of gifting money to your spouse for investment, consider lending to your better half for buying a property. As long as s/he pays interest to you for the loan (even if it is nominal), the rental income from this property will be taxable in his/her hands, not yours. On the other hand, if you buy a house in your spouse's name or transfer the second property to his or her name, it will be taxable in your hand. Instead of paying interest for the loan, your spouse can also transfer jewellery or any other asset which is worth equal to the property cost. In this case too, rental income will not be taxable.
One can give up to Rs 2 lakh (the tax exempt limit) without putting any tax liability on the partner.
Pay rent to your parents: If you live with your parents and pay them rent, you can claim that amount. "However, your parents will be taxed on this. Therefore, there are a few criteria for making such a claim. The house should be registered in parents' name and the parents should also show the amount as their rental income," says Chadha.
To lower their tax on this rental income, your parents can claim a flat 30 per cent of the annual rent as deduction for house maintenance expenses. Or, invest in Section 80C instruments such as the Senior Citizens Saving Scheme or five-year bank fixed deposits. Say you pay a rent of Rs 30,000 a month, or Rs 3.60 lakh a year.
Assuming your parents are senior citizens, their basic exemption limit is Rs 2.50 lakh. Which means, their taxable income is Rs 1.10 lakh, which can be invested to cut out on tax liability. Here, we are also assuming the parents earn solely through rental income, which may not be the case for interest income on bank deposit also qualifies as income.