Income tax rules have many opportunities for savvy investors to reduce their tax liabilities, and many of them involve taking the help of your family members. These innovative strategies aren't just about efficiently lowering tax liabilities, but also ensuring financial security for the family, as your family also stands to benefit from many of these strategies.
Ajay Pruthi, a Sebi RIA and founder of PLNR, sheds light on two ingenious methods that empower individuals to save significantly on taxes through family-based investments. One involves investing via a Non-Working Spouse and also opening FDs in your parent's names.
If you gift money to your non-working wife and she invests it, the tax department will include the earnings among your income. But there will be no tax implication if you invest in tax-free instruments.
Says Pruthi, “Normally, when you earn money from investments in your nonworking spouse's name, it gets added to your income, and you have to pay taxes on it. But you can still invest in your spouse`s name without paying additional tax. Here's an example: Invest Rs 1.5 lakh each year into your spouse's Public Provident Fund (PPF) account. Because the interest it earns isn't taxable, it won't be counted as part of your income. By doing so, you not only secure your spouse's financial future but also avoid extra tax burdens.”
Traditional fixed deposits might not seem like a tax-savvy option, but according to Pruthi, placing them under a parent's name can make them more tax-efficient.
This move capitalizes on higher interest rates available to senior citizens while leveraging their typically lower tax brackets compared to their children.
However, this strategy isn't without complexities. Issues might arise if the parent returns the entire FD amount along with interest to their children at maturity. Then the interest accrued on those FDs may be charged to the recipients. This provision aims to prevent tax evasion. In the event of the parent's demise, other legal heirs also may assert their claims to FDs.
Investing in the name of senior citizens, particularly parents or grandparents, can yield tax-free interest. If senior citizens in your family do not already have investments, Schemes like the Senior Citizens' Saving Scheme (SCSS) offer safe avenues for investments and can provide tax-free avenues.
Senior citizens, above 60 years, benefit from basic income tax exemptions up to Rs 3 lakhs, while those above 80 enjoy an even higher limit at Rs 5 lakhs. SCSS currently offers interest of 8.2 per cent and PMVVY offers 7.4 per cent.
Investing in a minor child's name is not effective due to clubbing their interest with the parent's income. However, once the child turns 18 years of age, their earnings are viewed separately for tax calculation purposes. By investing up to Rs 1.5 lakhs annually in their PPF account, parents can get an additional avenue for tax benefits and also secure their child's financial future.
FDs also help in this regard. Imagine you want to set aside a huge sum for your child's future education or marriage. If you decide to invest this sum in fixed deposits (FDs) under your name, the interest earned, will be taxable based on your applicable tax bracket. However, opting to invest the same amount in the name of your adult child can potentially eliminate this tax liability if your adult child is not a working professional. The tax slab will only come into play for him/ her after Rs 7 lakh, as there is no tax on income up to 7 lakhs as per the new tax regime.