Trim your tax bill by doing this: Gift money, pay rent to your parents

In addition to the tax deductions that are available to you directly, you can also leverage your family ties to reduce your tax liability further. Parents, for instance, can play a crucial role in this process, as specific provisions within tax laws allow this. It’s imperative, however, to proceed with caution so that you comply with both the letter and the spirit of tax laws.

Gift to parents

An effective tax-saving strategy involves transferring funds to your parents, especially if they are in a non-taxable or lower tax bracket. Says Soayib Qureshi, partner, PSL Advocates and Solicitors: “Gifts received by relatives are not subject to taxable income. According to Section 2(41) of the Income-Tax (I-T) Act, parents fall under the definition of relatives. Moreover, according to Section 56 of the I-T Act, such gifts are not subject to taxable income.”

Suresh Surana, founder of RSM India, suggests using a gift deed for such transfers. “Any income earned from that gifted money will be considered the income of the parent, potentially reducing the family’s overall tax liability,” he says.

Pay rent

For salaried individuals, claiming House Rent Allowance (HRA) is a common tax-saving practice. If you reside in a property owned by your parents, you can pay them rent. Says Ankit Jain, partner, Ved Jain & Associates: “While your parents will have to pay tax on the rent, you will be able to claim HRA benefits. Make sure that you actually pay the rent to your parents and they declare it in their tax return.”

Document these transactions properly. Have a rental agreement in place and also maintain proof of payments, so that you can establish the genuineness of these transactions to the tax authorities.

Health insurance premiums, medical expenses

If you have paid the premium for the health insurance cover of your senior citizen parents, then you are eligible for a tax deduction of up to Rs 50,000 under Section 80D of the I-T Act. This section also allows a deduction for preventive health check-ups, capped at Rs 5,000 within the overall limit of Rs 50,000. This deduction can be claimed for payments made on behalf of parents, apart from the same deduction being available for payments on behalf of self, spouse and children.

Moreover, if your parents are 60 or older and lack medical insurance, you can claim a deduction for their medical expenses of up to Rs 50,000, provided the payments are made via non-cash modes. Keep all the bills and receipts for the expenses paid by you.

Invest in their name

According to the tax slabs for senior citizens for the financial year 2023–24, their tax liability on income of up to Rs 3 lakh is nil. Says Jain: “If your parents fall in a lower tax bracket, you can invest money in their names. The income from these investments will be taxed at a lower rate.”

An individual can reduce tax liability by depositing excess funds in the accounts of parents since people over 60 years of age can claim up to Rs 50,000 as tax-free interest earnings from bank fixed deposits, savings accounts and post office schemes. This tax benefit is available under Section 80TTB.

Investing in equity-linked savings schemes (ELSS) and small savings schemes will also allow your parents to benefit from tax deductions under Section 80C, while you will earn higher returns. For instance, if the parents are senior citizens, they can invest in the Senior Citizens Savings Scheme, which offers a high interest rate of 8.2 per cent per annum. The investment in this scheme is also eligible for tax deduction under Section 80C. While the interest income from the scheme is taxable, it will be taxed at the parent’s lower slab rate.

By investing in your parent’s name, you can also take advantage of higher long-term capital gains (LTCG) tax exemption on equity investments. Long-term capital gains up to Rs 1 lakh from listed equity investments are tax-free.

Clubbing provisions for child to parent asset transfers
 

 - Clubbing provisions do not apply where the children are adults and they gift money to their parents

- Any transfer or gifts of money between parents and adult children would not be subject to tax, and income arising from investments made in the name of parents would be taxable in the hands of the parent

- However, these tax implications only apply to cases where such transfer is not revocable

- A revocable transfer is one where the transferor, directly or indirectly, retains right over the transferred asset, or can regain ownership of the asset at a later stage

- According to clubbing provisions, income arising from a revocable transfer of an asset will be clubbed in the hands of the transferor

Source: RSM India