Seven ways your family can help you save taxes

24 Jan, 2014, 2224 hrs IST, Chandralekha Mukerji, ECONOMICTIMES.COM

To make things simpler, here we list 7 perfectly legal ways your family can assist
you cut your tax bill:
Your family is always there to give you support -- not just emotional, but sometimes
financial as well. For instance, your family members can be of great help for saving
on taxes. However, all your investments and spending for your family are not
eligible for tax rebates. There are rules and some of them are pretty complex. To
make things simpler, here we list 7 perfectly legal ways your family can assist you
cut your tax bill:
1. Buy health insurance for the family: A medical insurance is a necessity that
helps you save taxes. If you buy it only for yourself, you can save up to Rs 15,000,
but if you buy it for the whole family (including your parents), you can save up to Rs
40,000.
Under Section 80D, a deduction of Rs 15,000 can be claimed for the health
insurance premium and preventive healthcare check-up costs for yourself, spouse
and your children. If you decide to protect your parents as well, you get an
additional deduction of up to Rs 20,000, if they are senior citizens. Otherwise the
regular Rs 15,000 limit is also applicable for your parents. Also, this deduction is
available irrespective of whether the parents are financially dependent on the
taxpayer or not. So, if your wife is an earning member as well, she can use the
same strategy and reduce the taxable income of the family by buying her parents a
plan as well.
2. Invest through your spouse: Exhausted your 80C limit? Gift some money to a
non-earning spouse and invest that in a tax-free instrument. There is no upper limit
to the amount you can give as your spouse is in the list of specified relatives whom
you can gift any sum without attracting a gift tax. However, the taxman is not
foolish. If you invest the gifted money, the Section 64 of the Income Tax Act, a
provision for clubbing income, comes into play. Therefore, the escape route is by
investing in a tax-free option such as a PPF or ELSS scheme.
Also, there is no tax on long-term gains from shares and equity mutual funds. So, if
you invest in them in your spouse name and then hold for more than a year, there
will be no additional tax liability. What's more? When you re-invested these earnings
from the investment, it will be considered the spouse income and you'll have no
further tax liability on that money. You can use this strategy even if your spouse is

earning, but falls in a lower tax bracket.

Similarly, you can also invest in your parent's name and the best part is the
clubbing rule won't be applicable here. Also, there is no gift tax on the money you
give to your parents. So make use of their a basic tax exemption limitRs 2 lakh for
up to 60 years, Rs 2.5 lakh for people above 60 and Rs 5 lakh if they are above 80
years of age. In case, they are exceeding the exemption limit, help them save taxes
by investing in a tax-free option.
3. Loan money to spouse: Another way to avoid tax is by showing the monetary
transaction as loan. So, for instance, if you buy a house in your wife's name or
transfer the second property to her, the rental income from it will not be treated as
your income if she pays you a nominal interest on the loan. She can also transfer
her jewellery worth the value of the property in your favour. Then also the rental
income from that house would not be taxable to you.
Even your fiancee (or, fiance) can help you save taxes. "If a couple is engaged, and
the one of them does not have any taxable income or pays tax at a lower rate, her
fiance can transfer money to her. The income from those assets won't be included in
his income because the transaction took place before they got married," says Sudhir
Kaushik, co-founder and CFO of Taxspanner.com. One can give up to Rs 2 lakh (the
tax exempt limit) without putting any tax liability on the partner.
4. Children can help as well: You must be already claiming a deduction for the
education fee of your children. You can also gift your minor child some cash. But if
you plan to invest that amount, the income will be clubbed with that of the parent
who earns more.
To avoid clubbing of your child's income, you may invest in tax free instruments
such as PPF, mutual fund (MF) or ULIP. Open a minor PPF account in the name of
your child and it won't be taxable. However, there is a limitation to this optionthe
contribution to your own PPF account and that of the child cannot exceed the
overall limit of Rs 1 lakh a year.
You can buy a child plan from an insurance company or invest in an MF. The
premium paid (or investment made, in case of MFs) by you for your child's future
qualifies for a deduction under Section 80C of the Income Tax Act, 1961. A private
trust for your child can also be created to save tax.
There is also a small deduction available in case that investment earns you some
money. You can claim up to Rs 1,500 exemption per child per year for a maximum of
two children. This means you can invest Rs 15,000 (or, Rs 30,000, if you have two
children) in a one-year fixed deposit scheme which gives an annual return of 10%,
and be exempt from tax.

5. Adult children can be big tax saver: The clubbing rule does not apply once
the child turns 18 and the person will be treated as a separate individual for all tax
purposes. This means, you can transfer money to a major child and have another 2
lakh exemption limit along all the exemptions and deductions any other taxpayer
enjoys. So you can freely gift him any amount of money and invest it for tax-free
gains. Your PPF limit also increases by another lakh. "You should also transfer all
investments made for the child's futuredeposits and investmentsin major child
name," says Kaushik. You can also invest if the child is 17 and will turn 18 before 31
March of that year and get the benefit for the entire year.
6. Pay rent to your parents: If you live with your parents, pay them rent and
claim your HRA. However, the house should be registered in their name for you to
make this claim. Your parents will be taxed on this. They can claim a flat 30% of the
annual rent as deduction is for maintenance expenses such as repairs, insurance,
etc., irrespective of the level of actual incurred expenditure.
So, say you pay Rs 25,000 a month, that is, Rs 3 lakh a year, your parents will have
to pay tax on only Rs 2.1 lakh. The amount that is over and above the basic Rs 2
lakh exempt limit (Rs 2.5 lakh in case they are above 60 and up to Rs 5 lakh if
above 80 years of age), can be invested in their name under tax-free Section 80 C
options such as the Senior Citizens Saving Scheme, five year bank fixed deposits or
tax saving equity mutual funds. You get a bigger benefit if the house is co-owned by
your parents. Then they can split the earning from rent and show separate tax
liability.
7. Family can help set off long-term equity losses: The tax rules allow you to
adjust short-term losses (held for less than a year) from equities against gains. But
long-term losses on which the securities transaction tax (STT) has been paid cannot
be adjusted against any income. However, if you haven't paid the STT yet, then the
sore lemons that have been lying in your portfolio for more than a year can be set
off. These long-term losses can be adjusted if you transact outside the exchanges at
the existing market rate with simultaneous delivery to the buyer.
The problem is finding a buyer offline and here your family comes in. "Selling the
equity investment to a family member can help you book a long-term equity loss by
without paying STT and can be adjustment with long-term gains. The sale should be
at the market price and the transaction by cheque to avoid confusion. Otherwise the
transfer within the family might be treated as a gift," says Kaushik.