• Notification Date: 20-03-2023
• Notification No: N/A

Make more Savings on Gift, Loan and House Rent

To reduce income tax as much as possible, Section 80C is a popular tool for commoners. It helps you in saving taxes and maximise your tax return.  

Gift to parents: 

You can gift money to your parents if they fall into a non-taxable or lower tax bracket. "Gifts received from specified relatives like parents, spouse, children etc, are not treated as income. Thus, they are fully exempt from income tax without any monetary limit," says Vaibhav Negi, tax practice head, ABA Law Office. 

Senior Citizens' Savings Schemes, post offices, and other tax-saving schemes can be used to invest this money. The spouse of an individual, brother or sister, brother or sister of the spouse of the individual, brother or sister of either of the parents of the individual, and any lineal ascendant or descendant of the individual are specified relatives as per tax rules. 

"Since people above the age of 60 years can claim up to Rs 50,000 as tax-free interest earnings from bank fixed deposits (FDs) savings accounts, post office schemes, etc., putting in the excess funds into the accounts of one’s parents can reduce the individual’s tax liabilities," says Sandeep Bajaj, managing partner, PSL Advocates & Solicitors. 

This tax benefit is under Section 80TTB. Even if the interest exceeds the exemption limit, they will pay a much lower tax than you. Senior citizen taxpayers are required to bear limited taxes even if their income crosses the tax-free threshold. "Moreover, those aged 80 and above can earn up to Rs 5 lakh tax-free per year," says Bajaj. 

Insurance and Rent: 

You can claim a tax deduction of up to Rs 50,000 if you purchase health insurance for your senior citizen parents. For parents under 60, this amount is Rs 25,000. This is a benefit under Section 80D of the Income-tax Act. 

You could pay the rent on behalf of your parents and claim a house rent allowance (HRA) exemption if you are a salaried employee living with your parents. 

If they are tax-exempt or less taxed than you, it works well. Under Section 24, they can claim a deduction of 30 per cent of the annual rent for repairs and maintenance. Regardless of actual expenditures on insurance, repairs, electricity, and water supply, this standard deduction applies. 

Loan to Spouse: 

Instead of a gift, consider giving your spouse a low-interest loan. "If a husband gives a loan of Rs 20 lakh to his wife at a reasonable rate, say 6 per cent, then in such case, interest income of 6 per cent shall be added to the husband's income, and income earned by the wife from the investment of Rs 20 lakh shall be taxable in the hands of the wife," says Suresh Surana, founder of RSM India. 

If the wife invested Rs 20 lakh in mutual funds/ bonds, etc and earned 10 per cent income, then 10 per cent income shall be taxable in the hands of the wife, as clubbing provisions will not get attracted due to the reasonable interest rate of 6 per cent charged by the husband to wife. "As such, the tax implication needs to be factored in case of a loan given by the husband to wife or vice-versa in the hands of both to ensure that the transaction does not result in tax inefficiency and is within the four corners of the law," says Surana. 

Bajaj says, "If one spends any money for one’s siblings' training, rehabilitation, or medical care, one is permitted a deduction of Rs 75,000 each year." Life insurance premiums paid to maintain certain disabled siblings, such as Jeevan Vishwas Endowment Assurance and Jeevan Adhar Entire Life Insurance plans, may also be deductible. 

Tax benefits on education loans, health insurance policies, or senior citizen deposits are simple. Make the most of them to start with, and then move on to the more complicated ones. "As such, the transactions entered into between the close relatives should be closely examined from the perspective of permissibility, and also that such tax planning is within the four corners of the law and is not in the nature of tax evasion," says Surana.