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In navigating the complexities of tax optimization, individuals can explore legal avenues to minimize their taxable income, particularly through strategic involvement of their parents. By leveraging certain provisions, such as gifting to senior citizen parents within specified limits, one can effectively reduce tax liabilities through indirect investments, especially if the parents of the individual do not have any taxable income or their taxable income falls way below their tax bracket.
Keshav Singhania, Private Client Leader, Singhania & Co. LLP explains how you can manage taxable income through parents:
Gifts to parents
If the parents of the individual are senior citizens, then he can make an irrevocable gift to the parents up to Rs 3 lakh, without attracting any taxes, and if their age is 80 years or older, then he can make such gift upto Rs 5 lakhs since they would fall under the super senior citizen category. Since cash gifts received from children or other close relatives is exempt from taxation, such gift will not be taxable on either of the parties. However, there are two key considerations to be kept in mind while making such gift.
Firstly, the gift should be irrevocable from the individual and secondly, the parents of the individual should not return this amount to the individual. In either of these circumstances, if the money is reverted back to the individual, then the income shall be considered as part of the individual’s income and will be clubbed with his rest of the taxable income.
Furthermore investing gifted amounts in the name of the parents, especially in banks or post offices, can further help in amplifying tax-saving benefits as senior citizens are entitled to a tax exemption on interest income upto Rs 50,000 under section 80TTB of Income Tax Act, 1961.
In short:
In short:
You can give your parents up to Rs. 3 lakh (Rs. 5 lakh for super senior citizens above 80 years old) without any tax implications
The gift should be irrevocable (can't be taken back) and your parents shouldn't return the money to you.
You can then invest this gifted money in the parent's name. This can be beneficial because:
Senior citizens get tax exemption on interest income up to Rs. 50,000.
Medical insurance:
Additionally, one can also invest in medical insurance or medical expenses for their parents and obtain an additional exemption upto Rs 50,000 under Section 80D. However, this exemption is halved, i.e. the exemption is available upto Rs 25,000, in case the parents are not older than 60 years old.
HRA
Moreover, individuals can avail themselves of additional deductions, if the individual lives with their parents, then they can also claim house rent allowance (HRA) by paying rent to their parents. However, such a transaction cannot be fictitious, i.e., the individual must truly transfer this money to the parents and should not have any stake of ownership in this house. If these considerations are not taken into account, then the same may be caught by the Income Tax Department when the scrutiny of Annual Information Statements is being done by them and then the individual shall be held liable for misrepresentation and furnishing false information.
" The house property is in your parents name, you can show that you are paying them the Rent staying in their house and claim the deduction under section 10(13A) as House Rent Allowance (HRA) if you are an salaried employee and under section 80GG if you have income other than salary. Further, the parents while filing their ITR can claim a standard deduction of 30% against the rental income under section 24," said Alay Razvi, Partner, Accord Juris LLP
SIP
If your mother falls in a lower tax bracket or has no taxable income, investing in an SIP (systematic investment plan) in her name can be a smart move. It will minimise your tax outgo. That said, there are a couple of risks associated with this strategy. Value Research explains these:
Risk of income clubbing If your mother returns the invested money later, the tax authorities may view it as a form of income clubbing. This means the money gets added to your income, not hers, and is taxed accordingly. In short, there's no escaping the taxman if your mother returns the invested money
Risk of estate planning
Entrusting your mother (or father) to invest on your behalf also poses legal issues. Because, legally, the investment belongs to them. In case they pass away, your siblings can stake a claim to the investment. This problem may arise even if you are the nominee, as inheritance laws typically treat siblings equally. Therefore, it's essential to weigh the benefits against the associated risks and legal implications when considering such tax-saving measures.
"While these strategies offer potential tax relief, individuals must remain vigilant about key considerations. Notably, investments made in name of the parents may be subject to inheritance laws if parents pass away intestate, i.e., without a Will, potentially affecting the individual’s ownership of the investment. In the event that the parents of the individual pass away intestate, then all of their investments, including the ones done indirectly by the individual, will be divided equally among all their living heirs. He must also consider the possibility of the entire investment being transferred to the legal heirs of the parents as per their wishes through Will since the entire investment was made in their name," said Singhania.
