Pay your family's insurance premiums and PPF contributions to save tax

While using the family to save tax is legal and smart, ensure you use the ones where clubbing income laws don't apply

It's tax planning season, and most know about common tax-saving deductions under Section 80C. But not many are aware that your family can actually help you save tax burden via less popular tax laws, overlooked by many inadvertently. Rajesh Bansal, managing director, Midas FinServe, a financial services firm says, "When it comes to your income tax, certain money heads can be associated with specific family members in a way that gets you tax breaks." 

Tax saving via spouse: 

There are a number of ways your spouse can help you save tax. 

Leave Travel: A person can claim benefit of leave travel allowance in respect of two journeys during the block of four years. Kapil Rana, founder & chairman, HostBooks Limited says, "However, if both spouses are employed, then both of them together can claim LTA for four journeys undertaken during the period of four years." 

Business: But what if you are a business person? Vivek Jalan, partner, Tax Connect Advisory Services says, "If one is an entrepreneur or professional and one’s spouse is also professionally qualified and assists in business/profession, then it might be fair to split the invoices between one’s firm and the spouse. In such a case, the benefit of Income Tax slab can be availed on the income from business/profession of the spouse also." For example, if both spouses are advocates and render professional services together, then the invoices to clients can be split so that the slab benefit for both can be availed under Income Tax. This would mean that twice the threshold benefits under Goods and Services Tax also, where GST is chargeable only in case the supply of services exceeds Rs 20 lakh in a year. 

Capital gains: As per section 112A, a person can claim exemption of Rs 100,000 on long-term capital gain arising from the sale of listed equity shares or units of equity-oriented mutual fund liable for Securities Transaction Tax. Rana says, "Since this exemption is allowed to every taxpayer, the investment can be made in the name of both spouses in order to avail exemption every year as long as possible."  

Loans: If you gift money to your wife and it is invested, the interest the investment earns will be clubbed with your income and taxed unless you choose a tax-free instrument like Public Provident Fund. Bansal says, "Instead, you can give a loan to the spouse who has no or low income, at a reasonable rate of interest." One more way is to give an interest-free loan to your wife in order to reduce taxable income. Clubbing of income is a situation in which an individual is taxed in respect of the income of some other person which is clubbed in his hands, in specified situations.

Tax savings via children: 

There are several ways where your children including adult children can help you save tax. 

Fees: Parents can use the benefits Section 80C offers for tuition fees paid for two children. Jalan says, "A parent can claim a deduction on the amount paid as tuition fees to a university, college, school or any other educational institution." 

Loan: If you have taken an education loan for your child, you get a tax deduction under Section 80E on repayment of interest for up to eight years starting from the year in which interest payment begins. You can also give your child a loan. Rana says, 'You can also save tax by giving an interest-free loan to your children in order to reduce your taxable income." 

Investments: You can invest in your child’s name as an investment in the PPF, certain Mutual Funds, ULIPs and traditional Insurance Plans and will be entitled to tax benefit under Section 80C. Bansal says, "However, the income will be clubbed with yours and taxed at applicable rates. To avoid this, you can invest in tax-free instruments like the PPF. You can also invest in equity mutual funds as there is no tax if the gain is less than Rs 1 lakh a year." Also, if you have opened a savings account for your child, Rs 1,500 of the interest income per child for two kids will be a tax-exempt tax benefit under Section 10 (32).

Savings tax via parents: 

You can save a decent amount of tax through parents. 

Rent: The taxpayer is entitled to arrange his affairs in a tax-efficient manner and accordingly, in a bona fide case, if he has to pay rent to his parents, he can claim the benefit of rent paid in the form of house rent allowance. Gopal Bohra, partner, NA Shah Associates says, " In order to demonstrate the bonafide of rental arrangement with his parents, one will have to retain the rental agreement, bank statement for payment, intimation to society about his tenancy, etc." 

Investments: If your parents are in the lower tax bracket, then you can invest in their names by transferring money to their account. The amount will be a tax-free financial gift and can be invested in schemes such as the Senior Citizen Savings Scheme, the monthly income scheme of the post office or even fixed deposits yielding higher returns. Note that senior citizens get a tax exemption of Rs 50,000 a year on interest earned from deposits in a bank. The tax exemption limit for citizens above 60 years is Rs 3 lakh and for those above the age of 80, it is Rs 5 lakh.

Sell shares to parents to offset loss: Long-term capital losses can be set-off against only long-term capital gains. Rana says, "If you are having loss-making shares in your portfolio for more than a year, then you can sell it to your parents through off-market transactions that mean without stock exchange market but this transaction should be made through the current market price and payment should be done through banking mode."

Parents-in-law: 

In a situation where your parents-in-law fall under a lower tax bracket than yours, you can gift them money and they can invest it in any investment.  Rana says, "Income earned on that investment will be treated as their income and will be taxable at a lower rate than the tax slab applicable to you. Also, that gift amount is exempt in the hands of parents-in-law."

Things to keep in mind:

While using the family to save tax is legal and smart, ensure you use the ones where clubbing income laws isn't a concern. (See table) Suresh Surana founder RSM India says, "The main intention behind the introduction of the clubbing provisions is to curb tax avoidance activities undertaken by taxpayers such as by transferring the assets to close relatives such as spouse to avoid paying taxes on high marginal rates." Note that for FY 20-21, you can choose the old tax regime and avail of the existing tax deductions and exemptions. Or you could choose the new tax regime, let go of the existing tax exemption and deduction and pay. Simply put, there will be no tax liability if your net taxable income does not exceed Rs 5 lakh. Surana says, "The choice of old tax regime or concessional new tax regime would not affect the applicability of the clubbing provisions. Surana says, "However, once such provisions are attracted, the income which is clubbed would be subjected to tax as per the tax regime opted for by the taxpayer in whose hands the income is clubbed."

Section	Scenario	Income to be clubbed in the hands of	Exceptions
64(1)(ii)	Income received by spouse of an individual from a concern in which the individual has substantial interest	Either husband or wife, whose total income (excluding the income referred to in that clause) is greater	Remuneration received solely on account of spouse’s technical or professional qualifications and experience
64(1A)	Income of a Minor child	Parent whose income is higher before such clubbing. If the parent’s marriage does not subsist, then the parent who is maintaining the child	Income accruing to the minor child on account of any manual work done by him or activity involving application of his skill, talent or specialized knowledge and experience or the minor child is suffering from specified disability
64(1)(iv); 64(1)(vi)	Income arising to spouse /son’s wife from asset transferred for no/ inadequate consideration	Transferor	a. Asset transferred to spouse under agreement to live apart

b. Relationship of husband-wife and mother/father-in-law and daughter-in-law does not exist either at time of transfer of asset or time of generation of income to which clubbing provisions apply 

c.  Asset is transferred for adequate consideration

64(2) Income from asset transferred by a member to HUF for no/ inadequate consideration Transferor member Asset is transferred for adequate consideration 64(1)(vii)/ 64(1)(viii) Income arising to any person from asset transferred for the benefit of spouse / son’s wife for no/  inadequate consideration Transferor Asset is transferred for adequate consideration Source: RSM India