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Save tax through Parents and children Research Team | Posted On Thursday, February 12,2015, 11:10 AM

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Save tax through Parents and children




You have heard the famous saying "Family is not an important thing, it’s everything."

When you lose everything you can still count on your family for support. Yes...Your family has another major benefit. Your family can help save you tax.

Invest through your non working spouse

You can invest in specific financial instruments to get a tax deduction up to INR 1.5 Lakhs under Section 80 C of the income tax act. Your taxable income is calculated after you avail a deduction of INR 1.5 Lakhs under these tax saving instruments.

Certain financial instruments under Section 80 C enjoy a “EEE” status. "EEE" means exempt exempt exempt. The investment you make in these financial instruments, The money accumulated with time and the returns on maturity are tax free. Some of these financial instruments which enjoy a EEE status are PPF and the ELSS.

You can gift your wife some money (Gifts to spouses up to any limit are free of tax).However if your wife invests this money the taxman clubs this investment to your taxable salary and you have to pay tax on any income (earnings or interest income) you get from the investment under Clubbing of Income under the Income Tax Act 1961.

So what is the way out? You gift your wife (non working spouse) some money and she invests this money only in tax free instruments. She can invest this money in a PPF or an ELSS. The money can also be invested in equity mutual funds or shares where long term capital gains(gains or profits you make after holding shares or equity mutual funds for over a year) are tax free.

You are not taxed on the earnings (income) you get from these tax free instruments as these are in your wife’s name. When the investment (shares, equity mutual funds, ELSS, PPF, Ulips) matures they can be reinvested and are in your spouse name. You are not charged any tax on these reinvested amounts as the income from these financial instruments is in your wife’s name.

Invest in your parents

If you take a health plan for your parents who are senior citizens then you can avail a tax deduction of INR 20,000 under Section 80D. If your spouse is working she too can avail a deduction of INR 20,000 on the health plan for her parents.

The net deductions you and your wife can avail is INR 40,000 under Section 80 D of the income tax act.

Save tax through your minor children

You can avail a deduction on the tuition fees you pay for your children’s education up to INR 1.5 Lakhs for a maximum of 2 children under Section 80 C of the income tax act. You can take up a child life endowment policy or even invest in a child ulip plan if you have a minor child and avail a deduction of up to INR 1.5 Lakhs under Section 80 C.

You can gift your minor child cash, as gifts to children are tax free. But if you invest this money, the income (earnings) from this investment will be added to the parent earning the higher income and taxed as per the respective tax bracket. (Clubbing provisions).

However if you invest in a tax free instrument such as an ELSS or a PPF then the interest earned or any income/gain from these instruments is not added to your income (or the parent earning the higher income) and taxed.(There is no clubbing of income).

If you invest in a PPF in the name of your minor child, then the money you invest in a PPF in your name and the PPF in your minor child’s name together should not exceed INR 1.5 Lakhs per annum.

Save tax through your adult children

Your child crosses the landmark of 18 years and is now a major. You can gift your adult child money, as gifts to your children are not taxed. After your child crosses 18 years (Is an adult) clubbing provisions no longer apply. Your child enjoys all tax deductions (Section 80 C and other Chapter V1 A deductions) and exemptions just as any adult.

If you have any investments you can transfer it to your adult child’s name (child who is 18 years) and any earnings from this investment will not be taxed (added to your taxable salary).

If your adult child is earning (say your son is 25 years and working) then this income (earnings from the gifted investment) is added to his taxable salary and he pays tax on this amount. This benefits you if he is in a lower tax slab. When your child attains the age of 18 years the PPF you invested when he/she was a minor is now solely in the adult child’s name. You and your adult child can avail a deduction under Section 80 C up to INR 1.5 Lakhs separately on the money invested in the PPF.

After reading this article you are reminded of a famous quote “Family is the most important thing in the World”. It certainly is and in more ways than one.

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