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How Family Members Can Save Income Tax In India
We all understand the importance of family. Family members provide crucial support at all times whether it is emotionally, mentally or financially. But we almost always forget the importance of family members while planning our taxes.
Taxes can be saved in an effective and completely legal manner by allocating some of our incomes and expense to our family members. Here is how:
- 1. Pay House Rentals to your Parents
We often ignore the tax benefits associated when living in your parents home. If you are living with your parents, you can claim exemption on your House Rent Allowance by paying rent to them. The important condition here is that the house should be registered in the name of your parents only.
This is better explained by the example below:
- Say you pay Rs. 40,000 as rent per month to your parents. That amounts to 4, 80,000 for the year. You parents will get the benefit of standard deduction of 30% so their taxable income (assuming they don't earn from any other source) will come to Rs. 3, 36,000. If we reduce the basic exemption limit of Rs. 2, 50,000, we are left with Rs. 86,000. They can then invest this amount in a tax-free option like PPF, Mutual Fund etc. and claim deduction under section 80C. If in case, they are above 80 years of age, then the whole amount will be tax-free as it falls below the exemption limit of Rs. 5,00,000 for Super Senior Citizens.
- In this manner, you will be eligible to claim exemption of your HRA by paying rent to your parents and they won't have to pay any tax either.
- 2. Have Children? Save Taxes!
You must always remember to claim exemption from the school fees of your children. If you have a minor child, you can gift some money to him but you can only invest that amount in tax-free instruments like PPF, Mutual Funds as discussed above. Keep in mind that the combined contribution to your and your child's PPF account cannot exceed Rs 1, 50,000 in a year.
You can also form a private trust in the name of your child to save taxes.
- 3. Loaning money to your Fianc
If your fianc does not have any taxable income or if she falls in a lower tax slab, you can loan some money to her without attracting the provisions of clubbing of income because the transaction took place before you got married.
- 4. Health Insurance & Your Family Member
Medical Health Insurance has become pretty much a necessity these days and you can avail benefits up to Rs. 25,000 on your own medical health insurance including your wife and kids. But if you pay the premium for health insurance for your parents also you get an additional deduction of Rs. 25,000 (Rs. 30,000 in case your parents are super senior citizens). It does not matter if your parents are financially dependent on your or not.
In case your wife is an earning member of the family, she also can use this technique for saving taxes by paying the life insurance premium of her parents.
- 5. Take Advantage of 80C Deduction Limit of Your Family Members
Income Tax allows you deductions up to Rs. 1, 50,000 under section 80C. If you have exceeded your own 80C limit, you can gift some money to your spouse or your parents without attracting any gift tax on the transaction.
They can invest this money in a tax-free option such as PPF, Mutual Funds etc. This will help you to avoid any provisions of clubbing and at the same time, any future income from these instruments is tax-free in the hands of your spouse/parents.
Now you know that your family can save you taxes on your hard earned income. Treat your family tonight, they deserve it!
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