scorecardresearchKin's love: Is this good tax planning to use family members for tax exemption?

Kin's love: Is this good tax planning to use family members for tax exemption?

Updated: 26 Mar 2023, 12:38 PM IST

One can give a gift to a relative as part of the income tax planning, one can also open term deposit accounts in the name of parents, particularly when they fall in the lower tax bracket.

Money gifted to a relative is taxable in the kin's hands

Money gifted to a relative is taxable in the kin's hands

Not only in the times of adversity, but in the times of properity too, one tends to count upon one’s family. And like most of us, income tax (I-T) department believes this too.

One can transfer some of the income to ther relatives in order to save tax – that too legitimately.

Remember that it should be done as part of ‘tax planning’ and not ‘tax evasion’ per se. Let us understand how is this done, and what are the nuances around it.

For instance, one can open a fixed deposit (FD) account in the name of one of your parents, particularly when they don’t have any taxable income, or at least when they do not fall in the maximum tax bracket.

A Mumbai-based chartered accountant Chirag Chauhan from Chauhan & Co., says one can give a gift to a family member in which case, income is not clubbed to the individual’s income who gave the gift. He also suggests that one can open a fixed deposit account in the name of parents (senior citizens) to avoid paying tax on interest income.

Interest income

Not all are aware that senior citizens are entitled to a tax exemption on interest income of up to 50,000 under section 80TTB of Income Tax Act, 1961. This means while your interest income will be taxable when it surpasses 10,000 but your parents won’t need to pay tax for interest income up to 50,000.

According to income tax provisions, income gets clubbed to individual’s income in case of spouse. But one can still use the family members' accounts as part of the tax planning. 

For example, if you fall under the highest tax bracket, you can open fixed deposits (FDs) in the name of your mother or father. There is another way of saving tax i.e., by giving a gift to your relative in which case, the clubbing provision does not apply. 

"Investments in recognized savings instruments such as PPF, tax saving FDs, life insurance, are eligible for tax deductions under sections 80C and 80D of the Income Tax Act. Investing in someone’s name would deprive the individual to claim the benefit of eligible exemption. However, if the FD is opened in close relative’s name who falls in a lower tax bracket than the individual, the interest earned will be subject to tax in the FD holder’s name. The amount can also be invested into the Senior Citizens Savings Scheme in the name of senior citizen parents to earn higher tax-free returns," says Akhil Chandna, Partner at Grant Thornton Bharat LLP.

Medical expenses

Those who are planning to buy medical insurance in the name of their parents are also entitled to receive 50,000 as part of tax exemption under section 80D. This amount reduces to 25,000 when parent’s age is less than 60.

One can also claim medical expenses for an amount up to 50,000 on parents above the age of 60 under the same provision.

Tax benefits from spouse

There are three ways in which one can use spouse’s account to save tax. First and foremost, if you are planning to take a home loan, it is recommended to take a joint home loan in order to save tax.

“After all, this will enable you to claim tax exemption of up to 3 lakh under section 80C instead of 1.5 lakh in case of individual home loan,” says a Delhi-based chartered accountant Deepak Aggarwal.

In case the property is self-occupied, one can claim 4 lakh tax exemption ( 2 lakh for each) under section 24b of the Income Tax Act, 1961.

Besides this, one can also give a gift to the spouse. Any income generated from the gift is taxable under spouse’s income. This is beneficial when your spouse’s income falls under a lower tax bracket.

Finally, one can give a loan to the spouse at a lower rate of interest. In that case, interest received on the loan is taxable in your name but any income earned on that loan money is taxable from the spouse’s income head.

Sibling love

In case you have a younger sibling, who is dependent, then you can claim tax benefits on several counts. For instance, any sum spent on dependent sibling’s care is tax exempt up to a maximum threshold of 40,000 under section 80DDB.

For disabled dependent, the limit is 75,000 as prescribed under section 80DD of the Income Tax (I-T) Act, 1961. Also, one can buy medical insurance in the name of dependent sibling and the premium is also exempt from tax.

As we sum up, we can highlight that it is important to understand that one can’t apply the same principals of tax exemption in each individual’s case.

“Every family has unique structure and different income patterns. So, one must do a 360-degree analysis. And importantly, one should not do it from the tax angle but from the investment angle too,” says Mr Chauhan.

"While planning to invest in close relative’s name, one needs to be highly cautious of their tax position for not violating any of the tax provisions," adds Chandna from Grant Thornton Bharat LLP.

Advantages of investing as a couple
First Published: 26 Mar 2023, 12:38 PM IST