Comprehensive Guide to Save Tax through Family
We earn for our family, we do financial planning and tax planning to support our family but have you ever thought that your family can also support you by becoming an active participant in your tax planning. Family can be a legal tool through which you can save tax and by family I mean your spouse, major and minor child and your parent and in-laws.
The Simplest and most used tax saving investment is buying a Health Insurance for family, as there is deduction of Rs.15,000 u/s 80D for insurance premium paid for self, spouse and dependent children. There is an additional deduction of Rs.15,000 for the health insurance of parents. Apart section 80D there are more ways to save tax through family.
Save Tax through your Spouse
Starting the tax planning with your wife is a good idea not because it saves you tax but woman always loves gifts. You can gift any amount to your wife with no restrictions as wife comes under the definition relative but the taxman is not foolish. The income earned from the amount given as gift to your wife will be clubbed with your income under section 64 and thus does not give you any tax benefit.
So how can you save tax? Simply invest in the tax-free instruments u/s 80C in your wife?s name such as Public Provident Fund (PPF) and Equity Linked Savings Scheme (ELSS).
You can also invest in the share market and hold them for at least one year, as there is no tax on long-term gains on shares, no additional tax liability will occur.
Now, Tax Savings comes in play. All the returns from the above investments are tax-free which your wife can further invest in her own name. The income earned from these investments will be taxable in her hand and no clubbing provision will apply. You can also take this route if your wife is earning but falls in lower tax bracket.
Another way to save tax through your wife is to give her loan.? For instance, your wife buys a house from the money you gave her as a loan. Now the rental income will not be clubbed with your income, if she gives you a nominal interest. The other method to save tax on the rental income of second house is to transfer house in your wife?s name by taking her jewellery of equal worth of house.
Save Tax through your Minor Child
You must already be claiming deduction of the tuition fee paid under section 80C. You can also gift money to your child but investing this amount will increase your income as the return from this investment will be clubbed with the income of high earning parent.
Minor child can only give you a minor help in tax saving as there is a small deduction of Rs.1,500 per child for a maximum of two children. You can invest in your child name which gives return around 10% p.a. such as fixed deposits of Rs.15,000 (or Rs.30,000, if you are blessed with two children) and have no additional tax outgo. A private trust can also be created for your child to save considerable amount of tax.
Recommendation: You must open a PPF account for your child and contribute on regular basis. Apart from being EEE instrument, this will not give any additional tax-benefit as the total limit of deduction for PPF contribution u/s 80C is restricted to Rs.1,50,000 which includes contribution towards your child?s PPF account also. But this corpus will be very useful for your child?s future.
Save Tax through Major Child
Major Child (attained the age of 18 years) can be big tax saver for you. The clubbing provision does not apply once the child attains the age of 18 and the child will be considered as a separate entity for tax purposes. This means, an extra exemption limit of Rs.2.5 lakhs and extra deduction limit of Rs.1.5 lakh u/s 80C. You should transfer all the investments and deposits made for the child?s future to your major child name.
You can freely handover any amount of money to him without worrying for taxman. He can invest it into any instruments like share market, buying a house, fixed deposits etc. As the income will be taxable in his hands and the marginal relief of Rs.2.5 lakhs can be utilized.
If for any reason you do not get nod of the taxman for giving gifts to your major child, then you may legally give him interest-free loans.
Save Tax through Parents
Apart from the health insurance policy, parents can also help you to save some extra bucks from your tax liability.
The best way is to pay them the rent and claim HRA but you should be living with them and your parents shall be the owner of the house. Your parents should also need to file an ITR showing the rental income. It would be ice on the cake if your parents co-owned the house, you can split the rental amount and both of them can separately show the rental income.
The other way is to lend some portion of your money to your parent as well as your parents-in-laws which they could invest and the return would be taxable in their hands. So at one end they are giving interest to you and on the other end they are earning interest. This allows you to lighten your tax burden.
Save Tax through Fianc?e
Before becoming your life-partner, Fianc?e can become partner in your tax planning. If she does not have any taxable income or falls in the lower tax bracket than you can transfer some money to her which she can invest and gain money. The income from these investments will not be clubbed with your income as the transfer took place before the marriage.
Words of Wisdom
Tax-Planning should be done in a way to minimize the tax outgo not to evade the tax.