A family is there for support always not only emotionally, physically but also financially. The member of family can be useful to save taxes. However, the investments and spending done for your family are not eligible for tax rebates. But there are some perfect legal ways by which your family can help you save or reduce your tax bill:
1. Investment through the spouse:
Exceeded your 80C limit? Gift some money to a non-earning (financially dependent) 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. But if you invest the gifted money, the Section 64 of the Income Tax Act, (a provision for clubbing income, comes into play) so beneficial is to invest 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, invest in them in your spouse name and hold it for more than a year, there will be no additional income tax liability.
- When you re-invested these earnings from the investment, it will be considered as the spouse income and on that money you’ll not be having any further income tax liability. You can use this strategy even if your spouse is earning (but falls in a lower tax bracket).
- Similar investment can be done in your parent’s name and the best part is that the clubbing rule won’t be applicable here. Also, there is no gift tax on the money you give to your parents. So you can make use of their a basic tax exemption limit—Rs 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.
2. Buy health insurance for the family:
A medical insurance is a necessity and can help you save taxes.
- If you are buying only for yourself, you can save up to Rs 15,000.
- If you are buying 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 case of your parents as well, you get an additional deduction of up to Rs 15,000, In case they are senior citizens (it would be up to 20,000, 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.
3. Loan money to spouse:
An alternative way to avoid income tax is by showing the monetary transaction as loan (for example if you buy a house in your wife’s name the rental income from it will not be treated as your income if she pays you a small interest on the loan. Your wife 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.
4.Tax saving by fiancee (or, fiance) :
When a couple is engaged, and the one of them does not have any taxable income or pays tax at a lower rate, the alternative partner can transfer money to the other partner. The income from those assets won’t be get included in the income because the transaction took place before they got married.
5. Children can also help save tax:
You must be claiming tax deduction on the education fee of your children. You can also gift some cash to your second child. But if you plan to invest that amount, the income will be clubbed with that of the parent who earns more to avoid this you must invest in tax free instruments (PPF, mutual fund (MF) or ULIP). There is a condition to this option that the contribution to (your PPF account + child PPF) cannot exceed the limit of Rs 1.5 lakh a year.
An addition investment you can do by buying a child plan from an insurance company or invest in an MF. The premium paid in such cases by you for your child’s future comes for a deduction under Section 80C of the Income Tax. A private trust for your child can also be created to save tax. 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:
Once the child turns 18 the clubbing rule does not apply and the child will be treated as a separate individual for all tax purposes (means a sum 2 lakh can be transfer in his/her name along with all the exemptions and deductions any other taxpayer enjoys). So this gift given to him/her can be invested for tax-free gains. Also your PPF limit also get increases by another 1 lakh. “You can also transfer all the investments made in the name of the child to him/her when the child is 17 and will turn 18 before 31 March of that year and get the benefit for the entire year.
6. Pay house rent to your parents:
If you are living with your parents, pay them rent and claim your HRA. But, the house should be registered in the parents name(your parents will be taxed on this). Your parents can claim a flat 30% of the annual rent as deduction for maintenance expenses(repairs, insurance, etc.)
So, say you pay Rs 30,000 a month, means, Rs 3,60,000 a year, then your parents will have to pay tax only on Rs 2,52,000. The amount that is more than the basic Rs 2.5 lakh exempt limit (Rs 2.5 lakh if they are above 60 years and upto Rs 5 lakh if above 80 years of age), can be invested in their name under tax-free Section 80 C(Senior Citizens Saving Scheme, Bank FDR, Equity mutual funds). A bigger benefit can be availed if the house is co-owned by your parents (joint holder) by this they can split the earning from rent and show separate tax liability.
7. Family can helpful for long-term equity losses:
The tax rules allow you to adjust short-term losses (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. These losses can be adjusted only if you transact outside the exchanges at the existing market rate with simultaneous delivery to the buyer.
The problem is to find a buyer here you can sell it to your family (Selling the equity investment at the market price to a family member can help to book a long-term equity loss by without paying STT and can be adjusted with long-term gains. The sale transaction should be done by cheque to avoid confusion. Otherwise the transfer within the family will also be treated as a gift.