Buying a health insurance policy for your parents or opening a PPF account in your child’s name can help you save income tax
Senior citizens are offered a higher tax deduction of Rs 50,000 and can also claim tax deduction of Rs 1 lakh for medical expenses for specific critical illnesses.
The income tax Act allows individuals to make certain transactions in the name of specific family members. Thus an individual can invest and insure through spouse, children and parents to earn higher returns and reduce his/her tax liabilities.
Investing through parents If an individual’s parents are in the lower tax bracket, then he can invest in their names by transferring money in their account. The amount will be tax-free monetary gift and can be invested in schemes such as Senior Citizen Savings Scheme, monthly income scheme of post office or even fixed deposits yielding higher returns. At present, senior citizens get tax exemption of Rs 50,000 a year on interest earned from deposits in a bank.
The tax exemption limit for citizens above 60 years is Rs 3 lakh and for those above the age of 80, it is Rs 5 lakh. The Central Board of Direct Taxes (CBDT) had also notified that those aged 60 years and above with a taxable income of up to Rs 5 lakh can now submit Form 15H in banks and post offices to claim exemption from TDS on interest income from deposits.
Paying rent to your parents to live in their house is also a smart way to save tax. The taxpayer can claim exemption of House Rent Allowance and, for that, the property has to be registered in the name of either parent. If the rent paid is more than Rs 1 lakh a year, then the PAN number of the parent will have to be mentioned. While the rental income will be taxable, they can claim deduction of 30% for annual maintenance and property tax.
Buying a health insurance policy for your parents can save you taxes and insure them, too. 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. The tax deduction will be on the premium paid, under Section 80D of the Income Tax Act, 1961. For those below 60 years of age, the deduction is Rs 25,000 on the health insurance premium paid for self, spouse and dependent children covered in a policy. Senior citizens are offered a higher tax deduction of Rs 50,000 and can also claim tax deduction of Rs 1 lakh for medical expenses for specific critical illnesses.
Investing through children An individual can invest in name of children through Public Provident Fund (PPF), Sukanya Samriddhi account (only for girl child) and five-year fixed deposit to get tax deduction under Section 80C. PPF is an ideal avenue for risk-averse investors to provide for children’s future needs, as it guarantees the principal invested and returns. One can invest up to Rs 1.5 lakh in PPF in a financial year, which gives annual compounded return of 8.7% at present. When an individual opens a PPF account for his minor child, the child’s account is maintained under the guardianship of the parent and both accounts are seen as one and the overall limit cannot exceed Rs 1.5 lakh. Either of the parents can open a PPF account on behalf of the minor. The documents required are a passport-size photograph, proof of age of the child and PAN of the guardian.
Any legal or natural guardian can open a Sukanya Samriddhi account in the name of the girl child and invest up to Rs 1.5 lakh in a financial year and claim tax deduction. However, there can be 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 the age of 10 years only from the date of birth. The current rate of interest paid on this scheme is 7.6% and the minimum amount of investment is Rs 250.
Money can be withdrawn from the account after the girl child attains age of 18 or passes 10th standard. Withdrawal can be up to 50% of balance available at the end of the preceding financial year.
The withdrawal can be made in one lump sum or in installments, not exceeding one per year, for a maximum of five years, subject to the ceiling specified. The account will be closed after 21 years from the date of account opening or at the time of marriage of girl child after attaining age of 18 years.