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 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. 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 option—the 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.