Investing in the name of family members can help save tax. Are you happy with just saving tax? Don’t you also want higher post-tax returns on your investment? You can use family members to save tax.
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Investing in the names of your parents, major children and wife can save you taxes. How can you make this happen? The answer is to invest through family members in ways that shift your tax burden to family members. Thus, you can take the benefit of income tax slabs.
Not only your parents, but your parents-in-law too, can help save you tax. All you need to do is give away a portion of your money to them (which would otherwise be taxed), either as a gift or a loan.
In the following years, your income tax burden becomes lighter as you have transferred your income to them. Now, that portion of your income will be taxed in their hands.
Let’s say your parents are senior citizens. According to the income tax slabs, senior citizens are exempted from tax up to Rs 3 Lakhs a year. Senior citizens can invest in a Senior Citizens Savings Scheme (SCSS) to save tax. SCSS earns a return of 8.3% and pays interest every quarter.
In addition, they can invest in tax saving fixed deposits (lock-in of 5 years) which offer an interest rate of around 7%.
You can now gift away money to your major children without paying any gift tax. If your major children make investments out of the gift money received from you, the income received from this investment, will be taxed in their hands and not yours.
You can also transfer your income to your children in the form of interest-free loans. There’s no way you can make any income out of this, but it’s a good way of avoiding tax and it’s legal.
You can make investments in the name of your spouse and claim tax benefits. For instance, you can pay premiums for Life insurance and health insurance plans for you + spouse, and claim a deduction under Section 80C up to Rs 1.5 Lakhs a year and Section 80D up to Rs 25,000 a year.
You may also transfer any asset or money as a gift to your spouse. If they invest the same at a later stage, any income arising from such an investment will be treated as your income. On reinvesting this income, the returns will be treated as your spouse’s income and will not be clubbed with your income for tax purposes.
Ask your spouse to invest the gift money in tax-free instruments like PPF or ELSS. She can even consider investing in equity-oriented mutual funds and shares. The interest income earned from PPF and returns from ELSS after 3 years are tax free and the long-term capital gains from equity-oriented mutual funds and shares are not taxed up to Rs 1 Lakh a year. Your spouse can now reinvest this money, as his/her income. This money is not taxed in your name.
Clubbing provisions apply only to the first level of income generated. On subsequent income, clubbing provisions cease to apply. Therefore, investing in the name of your spouse can help you save taxes in the long-run. Gifts given to spouse are not taxed.
Gifts are taxed only if their value is more than Rs 50,000 a year. If the value of gifts exceeds the said amount, then it is taxed as income in the hands of the receiver. Gifts can be in any form: cash, jewelry, movable and immovable property, shares and so on.
However, this rule is not applicable when you gift the following persons:
• Your and your spouse’s siblings
• Your parent’s siblings
• Your lineal descendants including spouses
• Your spouses’ lineal descendants including their spouses
So go ahead, plan your taxes wisely. Invest in the name of your family members, gift them or give them tax-free loans. Think family and save taxes!
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