Every individual on planet earth wants to save tax. Normally, a salaried individual can reduce tax liability by using Section 80C, Section 80D and Section 24 (for tax-savings on home loan interest). If a person wants to save additional tax, he/she can invest 50,000 annually in NPS for the same. These are normal ways to reduce your tax liability.
However, there are a couple of unusual ways of saving tax in India which are completely legal. Are you familiar with such rules?
Saving Tax in India – Other than 80C
Let us discuss the unusual way of saving tax in India, other than 80C, one by one to help you gain a clearer understanding.
Paying Rent To Your Parents
Although staying with your parents is emotionally satisfying but it gives you an added advantage to save your taxes at the same time.
If you are living with your parents, you can pay the rent to them and claim HRA. The rent has to be paid to the owner of the property i.e. the owner could be your mother or father.
Your parents would have to show this income through rent while filing their ITR.
Let me take an example – Ajay is working in a corporate and he falls under the 20% tax slab. While his father has retired now, he receives a monthly pension of around 25,000 . As per Ajay`s basic pay norms, he can claim HRA of 8,000 every month. But since he is staying with his parents, he does not claim it. In fact, he ends up paying an additional tax of 20% i.e. 96,000*0.20 = Rs. 19,200.
This 19,200 can be saved if Ajay starts paying a monthly rent of 8,000 to his father. The annual income of Ajay’s father is less than 5 Lakhs including pension. Therefore, he won’t have to pay any taxes on his total income.
Also Read: HRA Rules and Regulations 2020
Make The Investment In Parents Name
Fixed deposits are one of the best debt investment options, if your investment tenure is less than 3 years. But there is a major drawback with FDs – FDs are not tax-efficient. If that’s the case, then can FDs be made tax efficient by investing in Parents Name.
Let me again take an example – Ajay is working in a corporate and he falls under 30% tax slab. While his father has retired now, he receives a monthly pension of around 25,000. Ajay has a lump sum of 10 Lakhs which he wants to invest in FDs. Assuming 7% returns on FDs, Ajay will get an interest of 70,000 in a year. For this amount of 70,000, he will have to pay a tax of 30% i.e. Rs. 21,000.
Can Ajay give this money to his parents and invest in their name?
Yes, Ajay can do that without any hassle. If Ajay transfers these 10 Lakhs to his parent’s accounts, there’ll be no liability of tax on the same. In fact, this is considered a gift amount on which no taxes are imposed if it is given to blood relatives.(But ensure to make a gift deed for the same)
Also check – Gift Tax Rules in India 2020
Now, there’re 2 advantages of transferring this amount of 10 Lakhs to his parents’ accounts and investing in FDs. Since senior citizens get higher interest rates on FDs, Ajay’s father will get around 8% instead of 7%. Moreover, there will not be any tax liability too. So, there will be a tax-saving of around 21,000. Plus, an additional interest of around 10,000 i.e. total savings of 31,000.
This strategy is also very useful for NRIs residing in foreign nations such as the US and Canada. (i.e. NRIs which come under Global Income Declaration preview). By investing in your parent`s name, you won’t have to pay tax on the income generated through these FDs. Just ensure to be FATCA compliant.
Making The Investment In Child`s Name
First of all, I am not talking about a minor child here. The interest generated through the investment made in the name of a minor child will be clubbed into your income. So, there are no tax benefits of investing in the name of a minor child.
However, this can be extremely beneficial once your child turns major.
Let us take an example to understand this – You have accumulated a total amount of 20 lakhs for your child`s education. The educational fee per year is 5 Lakhs. Suppose you invest the same amount in FDs in your name. Assuming a 7% interest rate on 20 Lakhs, you will get an interest income of 1.4 Lakhs. Assuming a tax bracket of 30%, you will have to bear an additional tax of 42,000. But if you make the same investment in your major child`s name, there will be no tax.
The same strategy can work wonders in case of marriage of your child as well.
This is somewhat complex. Suppose you have received an ancestral property whose annual rental income is 4 Lakhs. In a normal scenario, these 4 Lakhs would be included in your income and taxed as per your slab.
But if you create a HUF and the property is under the name of HUF, you won’t have any tax liabilities. The tax will be paid by HUF which is an altogether different entity. With an annual income of 4 Lakhs, there would not be any tax on it. But if you add it to your income, there would be a liability of 1.2 Lakhs assuming a tax slab of 30%.
Now, these were the advantages of tax savings. Nevertheless, there can be some disadvantages too.
If you are the only child of your parents, normally you would own all the assets. But if you’ve siblings, they can claim on your parent’s asset, if you invest in your parent`s name. Although Nomination and will might turn out to be useful in this case, they can both be challenged.
2ndly, see to it that your child doesn’t misuse the large sum of money once you transfer in his/her account. But if you are unsure, don’t make the mistake of investing in your child`s name.
Similarly, HUF has some disadvantages too. Though creating HUF is easy but it is extremely difficult to break it.
So, what is your unusual way of saving tax in India, legally? Please share your thoughts in the comment box below. Till then,
Happy Tax Savings!