I had written about how investing intelligently on wife’s name can help you save taxes. This time we would be exploring how parents can help you save taxes.
There are 3 ways:
1. Pay Rent to Your Parents:
If you are lucky and stay in your parents house (means the house is on either your mom/dad or jointly held by them) you can pay them rent. It’s perfectly acceptable transaction by Income tax department. The rent you pay to your parents would be added to their income as rental income and taxed according to their tax slabs.
The deal gets even better if the property is jointly registered on both of your parents name as the income from rent would be split between both of them.
Also Read: 9 Questions about Tax Exemption on HRA
Here is an example:
You pay monthly rent of Rs 15,000 to your parents.
Benefit to you: you would get benefit of HRA exemption
Tax on Parents: As the above income would be rental income, here is how the tax on this would be computed:
- Total Annual Rent – Rs 15,000 X 12 = Rs 1,80,000
- Standard Deduction @ 30% = Rs 54,000
- Total Taxable Income from Rent = Rs 1,26,000
So Rs 1,26,000 would be added to your parents income and taxed according to their tax slabs. In case they have no other income then the entire amount becomes tax free.
Also Read: How your Children can Help you Save Taxes?
2. Invest in Parent’s Name
For your parents to help you save tax two conditions should be fulfilled:
- Your parents should be paying tax that is in lower tax slab than yours
- Since money is involved, there should be enough trust and understanding between you and your parents so that the money can be moved/ invested the way you plan
Technically you can gift money to your parents and it’s not taxable in their hands. So your parents can invest the gifted money from their account. Since they are in lower tax slab than you, they would pay lesser taxes and effectively saving taxes for you.
Also Read: Highest Interest Rate on Bank Fixed Deposits (FD)
Here is an Example:
- You invest Rs 1 Lakh in SBI Bank FD offering 9% per annum for 1 Year.
- At the end of year you would get Rs 9,000 as interest. If you fall in 30% tax bracket you would need to pay Rs 2,781 as tax and would be left with only Rs 6,219.
- On the other hand if the money was invested on your parents name you might not pay any tax at all if their total annual income was below the taxable limit of Rs 2 Lakhs. So you can save Rs 2,781.
If your parents are senior citizens then you might also benefit from the extra interest that banks offer on such FDs.
Though the amount seems small in the example but over long run and on higher amounts the tax saving would be substantial.
Also Read: Tax Planning Guide for FY 2018-19
Similarly, all investments whose returns are taxed on marginal tax rate can be done on your parent’s name.
- Fixed Deposit in Banks, Companies
- NCDs, Bonds
- Debt Funds/ Stocks invested for less than 1 Year which generates short term capital gains and is taxed on marginal rate of interest
3. Buy Health Insurance policy for Parents:
Under Sec 80D on Income Tax a deduction of Rs 25,000 (limit increased in Budget 2018) is deducted if you buy health Insurance for your parents. This deduction goes to Rs 50,000 if either your mom or dad is senior citizen. This deduction is available irrespective of your parent are dependent on you or not.
Also Read: Tax Benefit on Health Insurance u/s 80D
So go ahead and Plan Your Taxes with Your parents!