With over six months into the financial year, most taxpayers are exploring investment options for tax planning purposes. Did you know that by investing in parents’ or children’s name, not only can you earn higher returns, but also save on taxes?
Investment in child’s name
One can avail of deductions under Section 80 C of the I-T Act by investing in the name of children. For a girl child, one can invest in the Sukanya Samriddhi Account to claim deduction and earn higher interest. The rate of interest paid on this scheme is 9.2% per year. The minimum amount of investment is Rs 1,000 while the maximum is Rs 1.5 lakh in a financial year. Any legal or natural guardian can open an account in the name of the girl child. However, one person can open only one account in the name of one girl child and maximum two accounts in the name of two different girl children. The account can be opened up to age of 10 years only from the date of birth. For initial operations of scheme, a one-year grace has been given. With the grace period, a girl child who is born between December 2, 2003, and December 1, 2004, can open the account up to December 1, 2015.
If the minimum amount of R1,000 is not deposited in any financial year, the account will be discontinued by the bank or post office. But it can be revived with a penalty of R50 per year with minimum amount required for deposit for that year. Partial withdrawal, maximum up to 50% of balance standing at the end of the preceding financial year, can be made after the account holder attains the age of 18 years. The account can be closed after completion of 21 years. If the account is not closed after maturity, the balance will continue to earn interest as specified for the scheme from time to time. Premature closer will be allowed after completion of 18 years, provided that the girl is married.
Money deposited in the Public Provident Fund (PPF) in the name of your children is allowed as a deduction and interest accrued is also exempt from tax. However, the overall limit will be clubbed with the limit of the parent at R1.5 lakh a year. Also, premium paid for an insurance in your child’s name is allowed as a deduction under Section 80C.
Even by gifting money to your grown-up children, you can save taxes. Gifting any amount of money to your major children will not entail any gift tax and the money will be treated as their income. Moreover, you can give interest-free loans to your child, which would not be taxable. Moreover, a trust for minor children will eliminate the clubbing of income. Tax experts say by creating a trust for the welfare of the minor child, one can
save taxes.
Investment in parents’ account
If you have some investible surplus, you can transfer the amount to your parents’ account and the amount will not come under the gift tax if they are above 65 years of age. In turn, they can invest the amount in high interest yielding instruments like senior citizens savings scheme and bank deposits, which give about 50 bps higher interest rate to senior citizens. Paying rent to your parents to live in their house is also a smart way to save tax. The taxpayer can claim the exemption of House Rent Allowance and, for that, it is mandatory that the property is registered in the name of either parents.
Buying a health insurance policy for your parents can save you taxes. It will not only save them from delving into their precious savings to pay for the healthcare costs, but will also save you from paying higher taxes.
For the taxpayer, aggregate deduction for health insurance premiums and medical expenditure incurred in respect of parents would be up to Rs 30,000 a year, under Section 80D of the Income Tax Act. This deduction will be above the Rs 25,000 a year, which the taxpayer will get for health insurance for self, spouse and children.
The deduction for paying health insurance premium of parents is irrespective of whether they are financially dependent on the taxpayer or not, and the payment must be made by a cheque to avail the exemption.
Any amount spent on medical treatment or rehabilitation of handicapped dependent children can be claimed as deduction up to R75,000 under Section 80DD. In case of severe disability, however, the deduction allowed is R1.25 lakh. Also, if your child is suffering from a specified disease, deduction can be claimed under Section 80DDB for the expenditure incurred on treatment.