Children can also benefit from the higher basic exemption limit of Rs 5 lakh by clubbing investments.
The Union Budget 2011-12 would have definitely brought smiles on senior citizens’ faces. For those above the age of 80, Finance Minister Pranab Mukherjee has created a new category — ‘very senior citizen’ — and doubled their basic exemption limit to Rs 5 lakh.
Besides bringing relief to the aged, even their children and grandchildren can benefit, by clubbing investments with them. And, given the benefit is available for both, mother and father, one could save up to Rs 10 lakh. Of course, incomes cannot be transferred, but investing smartly can earn individuals higher returns. And, tax-free as well.
| MAKING THE MOST | |
| Transfer | Impact |
| FD, bonds, NSCs | Interest earned is added to the income and can become tax-free, if within basic exemption limit |
| Equity and equity funds | No STCG if total income is below '5 lakh and there are no LTCG |
| Buybacks and open offers | If held for less than a year, transfer in your parent's name and then sell as gains will be added to their income and taxed |
| Let-out property | Rent earned will be parent's income and completely tax-free if within basic exemption limit |
Say, your taxable income is Rs 10 lakh. If you invest Rs 2 lakh in a fixed deposit (FD) with your ‘very senior citizen’ father, there are two ways you can gain. One, banks offer high rate of interest, typically, 50-100 basis points, for senior citizens. In addition, if the returns fall below the basic exemption limit of Rs 5 lakh, there will no tax on the returns. It does not mean your taxable income reduces to Rs 8 lakh.
FINANCIAL ASSETS
Besides FDs, you can gift other financial assets such as retail bonds, National Savings Certificates and other instruments that attract taxes on the interest earned.
One could also transfer shares in the very senior citizen’s name, if there are share buybacks or open offers, as the returns will be added to income and taxed according to the slab. One could even use this strategy to reduce tax liability, if booking profits in shares in the short term (less than a year). The savings would be 15 per cent, if the total annual income of the very senior citizen is less than Rs 5 lakh. Profit-booking on equity investments of over one year are anyway tax free.
PHYSICAL ASSETS
If you receive a house rent allowance, pay the rent to your parents, if they own the house and claim a deduction. The tax liability will be passed on to your parents, as the rent will be considered as their income. It can help you claim the deduction as well as make the income tax-free in your parents’ hands, if the limit is not crossed.
But there could be hiccups from the income tax (I-T) department, if the house is owned by you and is transferred to your parents’ name. Reason: Transfer of ownership, followed by you paying rent to your parents, may drive the I-T officials to disregard the transactions and deny any benefit, says Homi Mistry, tax partner, Deloitte, Haskins & Sells.
Besides, if you have an ongoing home loan, you may have to forgo the tax benefits that come to you for making interest payments on home loans (up to Rs 1.5 lakh) and principal payment under Section 80C (up to Rs 1 lakh) of the I-T Act. And, you may have to bear additional costs such as stamp duty for the transfer.
Instead, Mistry suggests, if you have purchased a second house, it can be gifted to your father because any rental earned on the house will be added to your income. But this may be easier said than done. When you gift the money to your father, you will have to transfer the amount to his account.
Under Section 64 of the I-T Act, clubbing provisions are triggered in case of any income transferred by you to your spouse or minor children, not parents. But, in case the house is purchased immediately after the transfer of the amount, I-T officials can make an exception. “The immediacy of the purchase can lead to clubbing of incomes and it may viewed as a purchase made by you,” says Hanisha Amesur, senior associate, Nishith Desai Associates.
WATCH OUT FOR
Such assets or any other investment you make in your parents’ name will be considered as part of their estate on death. And, if there are other heirs, there can be dispute over the distribution of these assets.
Also, nomination will not be sufficient as it merely signifies trusteeship or makes you the caretaker of the property, until the legal heir stakes his claim. You must, therefore, be clearly marked as a legal heir to the properties concerned to avoid any dispute.
Last, to make the management of all the transferred assets easy, your parents can execute a power of attorney in your name. It will allow you to handle all transactions and paperwork on their behalf.
