To curb all black money transactions in India, the government has made stringent laws on benami property holdings (includes real estate, any kind of movable/ immovable, tangible/ intangible assets viz. jewelry, cash and investments). The idea is, if the asset owners fail to produce legal proof of source of earning which allows her/ him to own the asset, risk it being termed benami and being confiscated, leading to even imprisonment. Now, the tax evaders are under more pressure than ever before. However, one could save tax using legitimate ways, but gifting relatives in order to save tax would be probed very closely.
Here are the seven legal ways to save tax when you’re investing in the name of family members,
1. Invest gifted money in tax-free instrument
Even if you’ve exhausted your 80C limit, you could always transfer any amount to some tax-free instruments (viz. PPF/ ELSS funds, tax free bond & Ulips) in the name of your family member (your spouse/ a minor child/ your or your spouse’s lineal ascendants or descendants). This helps to club your income clause without affecting your tax liability.
2. Deduction available in case of minor child
You could claim a deduction of up to INR 1,500 per child in case of investments made in the name of minors. Hence, if you’re investing INR 30,000 for two kids in one-year FD scheme, it would give a return of 10% with a tax exempt.
3. There is no tax on long-term gains
Even if you’re not interested to lock your money in long term investments, you could invest the gift money in stocks and mutual funds and hold them for more than a year. However, if you’re investing in gold/ property/ debt-oriented mutual funds, the holding period is 3 years. There is no capital gains tax on equity assets held for more than 12 months.
4. The clubbing is only at the first level
If your earnings are reinvested, it would be treated as your relative’s income. And from the second year onwards, you would have no further tax liability on it. Even you could apply this strategy on your spouse’s earning but it would fall under a lower tax bracket.
5. Adult children are big tax savers
If a child turns 18, s/he would be treated as an individual for all tax purposes and hence the clubbing rule would not apply anymore. You could transfer money and enjoy another INR 2.5 lakhs tax exemption along with all other deductions and benefits. Even if you invest before the child is turning 18 before 31st March of any financial year and get tax benefit for the entire year.
6. Clubbing not applicable in case of parents
You could also invest in your parent’s name and the best part is the clubbing rules won’t be applicable here. Also, there is no gift tax on the money you give to your parents. A basic tax exemption limit is INR 2.5 lakh for up to 60 years, INR 3 lakh for those above 60 and INR 5 lakh if they are above 80. In case they are exceeding the exemption limit, help them save taxes.
There are huge tax benefits if you live with your parents and the house is registered in their name. You could pay rent to them and claim HRA benefits. Your parents on the other hand can claim 30% of the annual rent as deduction for maintenance expenses. They will be taxed for only the income above their basic tax exemption limit, which is INR 2.5 lakhs (INR 3 lakhs in case they are above 60 and up to INR 5 lakhs if above 80 years). You get a bigger benefit if the house is co-owned by your parents. They could split the earning from rent and show separate tax liability. This money could be invested in options such as the Senior Citizens Saving Scheme, five year bank deposits or tax saving equity MFs. You could consider buying health insurance for up to INR 25,000 (INR 30,000 if they are above 60 years) and claim deductions under 80D.
7. Show the monetary transaction as a loan
If you show the transaction as a loan where your relatives pays a nominal interest, income from that investment would be non-taxable since the clubbing provision is only applicable on gifted money and not a loan.