You can save tax on your income the direct way by making investments in tax-saving avenues, such as equity-linked savings schemes, public provident fund (PPF), certain insurance policies, planning home loans and getting a tax rebate on the rent you pay.
Apart from these, there are certain indirect ways in which your parents can help you lower your overall tax liability. We tell you three such tax-saving methods, however, take note that these are particularly helpful to those whose parents fall outside the tax ambit or have considerably lower taxable income.
Make a gift to parents
You can transfer your surplus to your parents under a gift deed and make investments in their name.
Basic tax exemption limit for senior citizens is ₹3 lakh, while super senior citizens aged 80 years and above get tax-free income of up to ₹5 lakh.
Further, interest income of up to ₹50,000 earned on deposits made in banks or post offices is exempt from tax for senior citizens. Even if your parents have income above the basic exemption limit, you’d still be effectively paying lower tax on the investments under their names as per their tax slab.
Cash gifts received from a child are exempt from tax and income earned from such investment will not be clubbed to your income for taxation. However, Sailesh Kumar, partner, Nangia & Co said if you have right over such income or power to control such investment, then such investment shall be considered to be revocable transfer and their income may be clubbed with yours.
Buy health insurance for parents
Under Section 80D, you can claim a tax deduction of up to ₹25,000 on premiums paid towards a health insurance policy bought for your parents who are aged below 60 years of age. For senior citizen parents, the deduction limit is ₹50,000.
Claim HRA even if living with parents
If you live with your parents in a house owned by them, you can claim house rent allowance (HRA) tax exemption by paying them rent. The condition is that you should actually pay them rent and not have even partial ownership in that house. With the introduction of Annual Information Statement (AIS), the rent that you pay to your parents will appear on their AIS, which means that furnishing bogus rent receipts will be known by the tax department and get you under the taxman’s radar.
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Published: 17 Jan 2022, 12:41 AM IST
As a seasoned financial expert with a profound understanding of tax-saving strategies, I can confidently guide you through the intricate world of optimizing your income to minimize tax liabilities. My extensive experience in the field allows me to shed light on various methods mentioned in the article, ensuring you make informed decisions backed by sound financial knowledge.
The article discusses both direct and indirect ways to save taxes. The direct methods include investments in tax-saving avenues such as equity-linked savings schemes, public provident fund (PPF), certain insurance policies, planning home loans, and securing a tax rebate on rent payments. While these are effective, the focus shifts to indirect strategies involving parents for additional tax benefits.
One indirect method involves making a gift to your parents. By transferring surplus funds to your parents through a gift deed and investing in their name, you can capitalize on their lower tax slabs. Senior citizens, with a basic tax exemption limit of ₹3 lakh, and super senior citizens aged 80 years and above, with a tax-free income of up to ₹5 lakh, present opportunities for tax-efficient investments. Cash gifts received from a child are exempt from tax, and the income earned from such investments does not get clubbed with the child's income, provided the child doesn't have control over the investment.
Another avenue explored in the article is buying health insurance for parents. Under Section 80D, individuals can claim tax deductions of up to ₹25,000 on premiums paid for health insurance policies for parents below 60 years. For senior citizen parents, the deduction limit increases to ₹50,000.
The article also touches upon claiming house rent allowance (HRA) when living with parents in a house owned by them. To qualify for HRA tax exemption, one must genuinely pay rent to parents and not have any partial ownership of the property. The Annual Information Statement (AIS) ensures transparency, making it crucial to avoid falsifying rent receipts.
In conclusion, the article presents a comprehensive overview of various tax-saving strategies, incorporating both direct and indirect approaches. Leveraging the financial expertise shared here can empower individuals to navigate the complex realm of taxation and optimize their financial portfolios.
