Save taxes with the help of your family under different sections of Income Tax Act

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Family can help you save taxes

Who does not want to save taxes? Saving tax is a good practice and the government of India also allows you to save taxes lawfully. There are a number of provisions given under the Income Tax Act that allows you to claim tax deductions. The Income Tax Act has different sections which allow taxpayers to reduce their annual income and subsequently their tax liability. You can claim tax exemptions for payment of house rent, investing in tax-saving schemes, home loan repayment, etc. But what if one tells you that you can also take your family’s help to save taxes? Well yes, you can! In this article, we will discuss all the possible ways by which your family members can help you to save on tax.

We will start with the parents!

Save Tax with help of Parents

Opening a fixed deposit or post office savings account under your parent’s name

Well, it’s parents again! Parents always save us from any mishap that we bring in our life. This time they can help you save taxes as well.

The first and foremost way to save tax with the help of parents is to park your savings in their name. Suppose you plan to open a fixed deposit account, which will help you earn a fixed interest annually. The interest earned through fixed deposits or post office savings accounts is considered ‘interest income’ and is exempted from tax only up to Rs 10,000 for individuals below 60 years of age. However, the same exemption limit for senior citizens or individuals above 60 years of age is Rs 50,000

There is a double benefit in saving money in your parents' names who are senior citizens.

  • First and obvious, they have a higher tax exemption limit when it comes to interest earned from fixed deposits and post office saving schemes. They can claim a tax deduction of up to Rs 50,000 annually as compared to only Rs 10,000 for non-senior citizens.
  • The second reason is that it is very likely that your parents (who are senior citizens) have already retired and the income they earn from pensions or other sources will not be enough to fall under any tax slab. Hence, even if they earn more than the allowed exemption limit, there are chances that the same will not bring any tax liability.

Let us understand both the points with an example. Suppose you have an elderly father who is above 60 years old. He has a limited income from the retirement pension and a few investments. Overall, his total income amounts to Rs 1 lakh annually. Now, you can take advantage of this and park your surplus money by opening a fixed deposit account in your father’s name. Even if the interest earned is Rs 1 lakh annually, your father’s total income will come to around Rs 2 lakhs, which will be completely tax-free. Furthermore, if your father’s age is above 80 years, he will fall under the super senior citizen category and can enjoy tax-free income up to Rs 5 lakhs.

Paying rent to your parents

Suppose you live in a house owned by your parents. You can make a rental agreement under your name and show a certain amount as rent paid, on which you can claim a tax deduction. Rent paid by a taxpayer is eligible to be claimed as a tax deduction up to a certain limit, under Section 10-13A of the Income Tax Act. 

For salaried employees, the condition is as follows:

Minimum of the following cases:

  • Rs 60,000 annually (maximum exemption limit)
  • 50% of the basic salary in case you live in a metro city and 40% if you live in a non-metro city
  • Actual total rent paid minus 10% of your basic pay
  • Actual rent allowance (HRA) offered by your employer

Suppose you have a basic salary of Rs 30,000, amounting to Rs 3,60,000 annually and you have made a rental agreement in which you showed that you pay your parents Rs 20,000 per month, amounting to a total rent of Rs 2,40,000 annually. Also, you get Rs 1,80,000 annual HRA from your employer. Now, the calculation stands as follows:

  • Rs 60,000
  • 50/40% of your basic salary = Rs 1,80,000 / Rs 1,44,000 
  • Rent - 10% of basic salary = Rs 2,40,000 - Rs 36,000 = Rs 2,04,000
  • Actual HRA = Rs 1,80,000

Hence, the least of the four is Rs 60,000, which is the maximum deduction that you can claim on the rent paid. 

Self-employed individuals or salaried persons who do not receive any HRA from their employers can also claim a tax deduction on rent paid, under Section 80 GG of the Income Tax Act.

The minimum of the following cases is taken into consideration for self-employed individuals or employees who do receive HRA:

  • Rs 60,000 (maximum deduction limit)
  • Actual total rent paid minus 10% of your basic pay
  • 25% of adjusted total income

But all the aforementioned cases have a catch. Since you are showing that you have paid a certain amount of rent to your parents, that will be counted as their income under ‘rental income’. If your parents have limited income from other sources and their total income is not taxable then doing this will benefit you a lot. However, in case the total income of your parents falls under an income tax slab, they can still claim a 30% tax deduction on this annual rent received for money spent on maintenance and repairs, as per Section 24.

Buying health insurance plans

You can claim a deduction of up to Rs 50,000 annually for paying health insurance plans premiums for your parents who are above 60 years of age. The tax deduction is also available even if your parents are not senior citizens, however, in this case, the maximum deduction limit is Rs 25,000 annually. 

Your life partner can be your tax-saving partner

Apart from being your life partner, your spouse can also become a partner by saving decent money on taxes. 

Joint Home Loans

Section 80C and Section 24 are the two popular sections under the Income Tax Act that allows you to save taxes on the repayment of a home loan. If you wish to take full advantage of tax deductions available under these two sections, opt for a joint home loan with your spouse. 

Claim up to Rs 3 lakhs deduction with Section 80C: Both you and your spouse can claim a tax deduction of up to Rs 1.5 lakh each. The deduction is based on the payment of the principal amount. Availing a joint home loan allows you to save a hefty sum by claiming up to Rs 3 lakhs on deduction annually.

Up to Rs 4 lakhs deduction under Section 24: Section 24 of the Income Tax Act allows you and your spouse to claim a tax deduction of up to Rs 2 lakhs each. However, unlike Section 80C, the deduction in Section 24 is based on the repayment of interest. 

Combining both, your spouse can help you to claim a tax deduction of up to Rs 7 lakhs annually on home loan repayment. 

Fund your spouse’s education with education loan

Section 80E of the income tax act allows you to claim tax exemption on the interest paid on an education loan taken for your spouse. There is no upper cap on how much deduction you can claim under Section 80E. Also, the benefit can be claimed for up to 8 years or until the interest on the loan is completely paid, whichever is earlier.

Lend money to your spouse

We know that there is no need to ‘lend’ money to your spouse. But what if doing the same will help you save taxes without losing anything? How? Well, let’s understand this-

Suppose you have invested as much money as you can bear to invest in tax saving investment instruments but still have enough left. You can lend that idle money to your spouse, which her/she, on his/her part, can use to invest as per her choice (calculated choice)!

The catch comes here- Let’s suppose that you charge an interest of 4% on the money lent to your spouse. On the other hand, she gets a return of 8% from the same money invested in one or several instruments. From that 8%, she will be paying you 4% as interest, which leaves her with a net gain of 4%, still a gain! You have to pay tax based on the same interest income. However, after calculating everything, you will see a reduction in your tax liability.

What else can be done?

Your spouse can choose to invest the borrowed money in a capital instrument (mutual funds, bonds, etc), which will allow him/her to save tax through long term capital gains. Long term capital gains (LTCG) of up to Rs 1 lakh are exempted from taxation. 

Furthermore, she can opt to invest in tax-saving capital instruments like ELSS, which can offer around 7-8% returns annually. The investments made in ELSS can be claimed as deductions to reduce the net tax liability.

It does not end only with parents and spouses. Your children can also help you to save tax or reduce tax liability. Let’s see how.

Gift of God- for a reason!

Let the last part of reducing your tax liability be handled by your children. 

Keep money in your child’s name

Parking money under your child’s name can help you save a few bucks easily. If you keep money in your child’s bank account, be it savings or fixed deposit, you can claim up to Rs 1,500 tax deduction on the interest earned under Section 10 (32) of the Indian Tax Act. Furthermore, you can avail this tax saving benefit for up to three children, which means a total deduction of Rs 1500 x 3 = Rs 4500 for three children. 

Gift money to your child for investment

You can give your idle cash to your children so that they can invest in tax-saving instruments. Once a child becomes an adult, i.e; he/she is considered independent of their parents. Hence, your adult child’s income from the investments will not be considered yours. Also, considering the fact that it is unlikely that your child would not be earning enough money for which he/she will have to bear tax liability, the interest earned from the investments will go tax-free. Or if not, he/she can choose to invest in instruments where returns are tax free.

Save tax on interest paid on your children’s education loan

Section 80E allows you to claim a deduction on the interest paid on an education loan. We already learned how this can be used to save tax with the help of a spouse, the same also applies to your children. You can take an education loan for your child’s studies and claim an unlimited tax deduction annually on the interest paid on the loan. You can enjoy the deduction for up to 8 years or until the interest is repaid completely, whichever comes first.

Buy health insurance for your children

Section 80C of the Income Tax Act allows you to claim an annual deduction of up to Rs 1.5 lakh on the health insurance premiums of your children. Moreover, you can claim an additional deduction of Rs 9,600 under Section 10 of the Income Tax Act if you have two or more children. 

Save tax in case your child happens to be a disease/disability

The Income Tax Act is generous enough to offer tax exemption to parents who have a child suffering from a disease or has a disability. These are the following deductions allowed under Section 80DDB.

  • If your child is suffering from a serious disease, you can claim a deduction of up to Rs 40,000 annually for the expenses incurred in the treatment. 
  • On the other hand, if the child has a disability, the maximum deduction limit is Rs 75,000 annually.

Tax saving on educational expenses

  • It is not that you have to take a loan to save taxes on your children’s education. You can claim a deduction of Rs 300 per month for each child up to a maximum of two children as an education allowance.
  • You can also claim a deduction of Rs 100 per month for each child up to a maximum of two children for the money spent on the hostel fee for your children.
  • Both my parents are above 80 years of age and one of them still earns. How can I reduce the tax liability in this case?

  • I have three children, what is the maximum deduction I can claim without taking an education loan?

  • Is it true that I can claim a deduction of Rs 7 lakhs on home loan repayment?

  • What is the maximum deduction limit for education loan repayment?

  • Does Section 80DDB allow deduction on treatment expenses for any type of illness for the child?