Your parents get certain deductions under the various sections of the Income Tax Act, 1961. You can plan your investments and affairs in a way that can help you reduce the overall tax expense of the family. When you route your investment through your parents, your tax burden shall reduce, but the tax expenses of your parents will rise. So, the tax planning should be done in a way that the overall tax burden of the family should not be higher than the previous tax burden. There are tax provisions which will help you do this.
Here are some tips to help you save more tax.
Gift To Parents and Invest In Their Name
You can gift money to your parents, or your parents can gift money to you without any tax complication. In other words, if your parents receive money from you, it will not be charged to tax and any income earned on it will also not form part of your income for taxation purposes.
You can gift money to parents for the purpose of investment. Income earned on the money gifted to your parents will be considered for taxation in their return. So, you can save tax and earn more by investing money in their name. This works better if your parents are in a lower income tax slab.
If your parents are senior citizens and in a non-taxable income bracket, you can save a higher tax amount. Interest income up to Rs 50,000 by a senior citizen on bank/post office deposit is allowed as a deduction u/s 80TTB. Also, senior citizens get a higher interest on bank fixed deposits in comparison to non-senior-citizen FDs. So, you can invest in FDs in your parent’s name and enjoy greater interest while enjoying tax benefits as well. Where on the one hand, you will earn higher returns, on the other hand, your parents can enjoy tax deductions under Section 80C by investing in various investment instruments such as ELSS, small saving schemes, etc. You can also enjoy overall more LTCG tax exemption benefits on equity investment by investing in your parent’s Demat account. Long-term capital gains of up to Rs 1 lakh from listed equity investments will go tax-free every year both in your and your parent’s ITR.
Also Read: Top 5 investment options for senior citizens in 2023
Pay Rent To Parents And Claim HRA
If you live in your parent’s property, you may pay them rent and take benefit of the house rent allowance (HRA) within the exemption limit allowed u/s 10(3A). This hack works when your parents fall in a lower tax slab than yours. You can save significant tax as a family in case your parents are senior citizens or don’t have any taxable income. However, the property must be owned by one or both of your parents. To claim your HRA deduction properly, you need to transfer the rent to their bank account or pay via a cheque.
“You need to pay rent regularly and get the rent receipt from your parents to claim the HRA benefit. Your parents should also show the rental income in their tax returns,” says Adhil Shetty, CEO, Bankbazaar.com.
Get Health Insurance for Parents to Claim Tax Benefits
If you buy health insurance for your parents, it can help you significantly increase the tax deduction benefit.
Naveen Wadhwa, DGM, Taxmann, explains, “An individual taxpayer can claim relief for expenses incurred for the maintenance and support of parents. The relief is subject to certain conditions and limits and is available under Sections 80D, 80DD and 80DDB of the Income Tax Act. Under Section 80D of the Income Tax Act, an individual taxpayer can claim a deduction for the medical insurance premium paid for his parents. The maximum deduction is Rs 25,000, and this limit increases to Rs 50,000 if the parents are senior citizens. Furthermore, if the senior citizen parents are not covered under any medical insurance, the individual taxpayer can claim a deduction of up to Rs 50,000 for the medical expenses incurred on them.”
Under Section 80DDB, an individual taxpayer can claim a deduction for expenses incurred on the medical treatment of a specified list of diseases or ailments for his parents. The limit of deduction is Rs 40,000. However, it can be increased to Rs 1,00,000 if the parents are senior citizens.
“Section 80DD allows a deduction when the assessee incurs any amount on the medical treatment of a dependent parent with a disability. A flat deduction of Rs 75,000 is allowed, which increases to Rs 1,00,000 if the parents are suffering from a severe disability,” adds Wadhwa.
When taking help from your parents to save taxes, however, you should be careful about properly managing records of every transaction and help them file the income tax return on time every year. Also, don’t forget to report the gift transactions while filing the income tax return.