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How investing for parents can help you save tax???


How investing for parents can help you save tax???
Do you have some excess cash that you want to invest? Maybe you can think of an indirect method of investing (that is not in your own name), and save some tax on the income. Investing in assets or financial instruments directly in your own name will increase your tax liability and could also push you into a higher tax bracket. One way of saving on taxes is to gift your parents assets and cash for investments.
Your parents can help bring down your tax liability in several ways. Here are four smart strategies that can reduce your tax outgo.
1.       Invest in their name if they are in a lower tax bracket
Every adult enjoys a basic tax exemption limit. For senior citizens (above 65 years), the basic exemption limit is Rs 2.5 lakh a year. If any or both of your parents do not have a high income but you have an investible surplus, you can avoid tax by transferring money to them which can then be invested in their name.
Let's take a look at this table to understand such benefits better:
Senior citizen
Salaried individual
(30% tax bracket)
Amount invested (Rs.)
50 lakh
50 lakh
Yearly income
2.5 lakh
5 lakh
Tax liability
NIL
1.5 lakh
Tax saving
1.5 lakh
It is evident from the above table that any individual within the tax bracket of 30 per cent can save up to Rs. 1.5 lakh a year by investing through parents. Also, this saving can be bigger if your parents fall under the 'super senior citizens' category which is eligible for an even higher tax free income of up to Rs. 5 lakh.
This strategy won't work in the case of your spouse or minor children. Any amount given to a spouse is tax free but if it's invested, the income is treated as that of the Individual who transfers the same. Similarly, income from investments in a minor child's name is added to the income of the parent who earns more and is taxed accordingly. No such clubbing provisions come into play when money is transferred to a parent. There is also no limit on the amount you can give to your parents.
2.       Pay them rent if you live in their house
You can pay them rent to claim House Rent Allowance exemption. This is possible only if the property is registered in the name of your parent. The owner will be taxed for the rental income after a 30% deduction. So, if you pay your father a rent of Rs 3 lakh a year (Rs 25,000 a month), he will be taxed for only Rs 2.1 lakh. It would be a cherry on top if the house is jointly owned by your parents as the income could be divided among them separately.
3.       Sell shares to them and offset losses
If you have kept loss making shares in your portfolio for over a year, you can consider selling them to your parents in an off-market transaction. A long term capital loss on shares could be set off against long term gains if you sell the shares in an off-market sale, which is a transaction without going through the exchange. Finding buyers off-market is difficult, therefore, you could sell them to your parents in order to set off losses. An off-market transaction is a private deal between the buyer and seller without the exchange as an intermediary. The sale should be at the market price of the shares and the buyer should pay the sum by cheque. Otherwise, the taxman might treat the transfer as a gift.
4.       Buy them a health insurance policy
This is the simplest and most commonly used strategy to save tax through your parents. Buy a health insurance policy for them and get deduction for the premium paid under Section 80D. Up to Rs 15,000 a year is deductible from your taxable income if you buy a health insurance policy for your parents. If the parents are senior citizens, the deduction is even higher at Rs 20,000. This exemption is over and above exemption for your own health premium.
This Article has been Shared by Student of ICAI Palak Aggarwal. She can be reached at aggarwal.palak2809@gmail.com

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