Investing money in the name of your spouse, child or even parents name, is a way of saving taxes for many people in India. Are there any other ways to save tax legally? Transferring your money to your family member’s account doesn’t help you in saving tax, since this is not considered a gift. The tax implications you involve when you gift a family member money, and what is the right way you can save tax?
In a scenario, where we have a couple Ashok and Tara, who have been married for 3 years. Ashok, earns annual salary of Rs. 10 lakhs at a respectable job, and Tara is a homemaker. Ashok decides to give his wife a gift of Rs. 1 lakh for whatever she wishes to do. Tara, makes an investment in the bank, by starting a fixed deposit which will give her a 10% interest per annum. With this investment made, Tara now earns an income of Rs. 10,000.
This transaction between them, will now have 3 different tax implications for the giver, receiver, and income earned from the investment made.
Giver: The husband thinks that by giving his wife the Rs. 1 lakh, his taxable income reduce to Rs. 9 lakhs, on which he will pay taxes. This is not allowed. Ashok, has to pay his taxes on his total income first, and then he can give an amount to his wife or any other family member.
Receiver: The receiver will be exempt from tax on receiving gifts from a list of relations, husband being one of them. Making this transaction completely free of tax for Tara. If Tara had received this amount from any one apart from the list of relation allowed she would be taxed for this amount. List of relations allowed by the Income Tax is spouse, brother or sister, brother or sister of your spouse, brother or sister of any one of your parents, any lineal ascendants or descendants, spouse’s lineal ascendant or descendant, spouse of the persons mentioned earlier.
Income Earned: The Income Tax Department is smart enough to realize that taxpayer will try to pass of paying their taxes by gifting their spouses who are homemakers, money. Since they don’t have an income they will not require to pay tax, making it tax-free. Therefore the Income Tax Department has a process to ensure the both husband and wife’s money are clubbed under one in the Income Clubbing provisions, in which one person will add their income to the other’s income. So you will not save tax again!
Gifting - Tax Exemptions
With the below mentioned ways, you can always enjoy tax exemptions.
- The money you intend to gift, invest in tax-exempt instruments instead: Investment made in tax-exempt instruments such as ULIPs, ELSS mutual funds, Public Provident Fund, Senior Citizens' Saving Scheme, New Pension Scheme, Pension Plans etc, rather than fixed deposits. With the earnings of these instruments a spouse can invest the earned income anywhere she wants, this will be totally her income and will not be taxed under the clubbing provisions as well.
- Investments made under your parent’s name: Let’s assume you have Rs. 4 lakh to invest, making the investment in each of your parent’s name will be equal to no tax, how is possible this you ask? If you invest this Rs. 4 lakh in under your name, with a 30% tax bracket at a 10% interest rate, your income on this Rs. 4 lakhs will be Rs. 40,000 with the rate of income tax being 30% you will need to pay almost Rs. 12,000 as income tax. The same amount invested in each of your parent’s name (Rs. 2 lakh each) and because this is lower than the limit set of Rs 3 lakhs for senior citizens, they will not be taxed. The income earned by each of you parents will be Rs. 20, 000, and the tax they pay will be Rs. 0.
- Make investments under your child’s name who is 18 years and above: If you have children who are 18 years or older, then rather than gifting your surplus money to them, investing the same money in their name. The money will not attract any gift tax, or will not even have clubbing of income applied. Any income earned from this investment from the gift given to you major child will be taxed as per their tax brackets, under their name.
There are many ways you can save income tax, with making investments in the name of your family. This is legal and also beneficial not only for you but your family as well.