Gifting money for investing in some select instruments also allows you to enjoy a return.
Saving tax is the main motto of all taxpayers. While some hire chartered accountants, others pore through tax laws, or ask friends to find out if there are ways by which they can save.
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.
You can save income tax up to Rs 8.3 lakh every year if you fit the following profile: you have both parents who are 65 years or above, and a daughter and a son aged over 18. And, none of them have income. All you need to do is to gift them cash – slightly over Rs 1 crore and ensure that it is invested in fixed deposits.
“Since gifting parents or adult children does not attract tax, many business families optimise their tax by broadbasing their income this way,” says Suresh Surana, director, RSM Astute Consulting.
Here’s how you go about it. Income tax deductions allow senior citizens a tax-free income of Rs 2.4 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 2.4 lakh) that each parent enjoys. So, they don’t even need to file tax returns.
Similarly, if the son is gifted Rs 20.7 lakh and if he invests the same in an FD, his income of Rs 1.59 lakh will be tax-free. For daughter, the tax-free income is Rs 1.9 lakh. This means a gift of nearly Rs 24.6 lakh.
Gifting is important because, since the abolition of gift tax in 1998, gifts are no longer taxable in the hands of the donor or the receiver. This benefit is not just restricted to cash. A gift is transfer of money in cash or through a cheque without any services rendered as well as voluntary transfer of existing movable or immovable assets without any money consideration.
So, if you gift your child a property that yields income, this too will help you save tax. However, for such transfers, one needs to make a gift deed, which attracts stamp duty and registration charge.
However, if you gift a financial asset to your wife, the gain arising out the asset is clubbed with your income and taxed. The same procedure is followed in case the child is a minor.
Financial planners say in many cases, gifting financial assets not only helps optimise tax, but can also used to make sure the family members are financially secure in case something goes wrong with the breadearner. “A person should try and optimise post-tax income rather than making an investment that yields low returns or does not help him meet his goals,” says a certified financial planner.
