Do you have some excess cash that you want to invest? Maybe you can think of an indirect method of investing (that is not in your own name), and save some tax on the income. Investing in assets or financial instruments directly in your own name will increase your tax liability and could also push you into a higher tax bracket. You can take a slightly circuitous route on investments for better mileage. One way of saving on taxes is to gift your children and parents assets and cash for investments.
As per the current laws, any gift received in cash or kind exceeding Rs 50,000 is taxed in the hands of the recipient as "income from other sources". However, this rule does not apply to gifts received from relatives. Additionally, any gift received on the occasion of your marriage, under a will or inheritance is not taxed in your hands.
So who is a relative and what is a gift for the purpose of claiming tax benefits?
"Relatives, for the purpose of taxation, include spouse of the individual, siblings, brothers and sisters of the spouse, brothers and sisters of the parents, and any lineal ascendant or descendant of the individual or the spouse," says Vikas Vasal, executive director, KPMG India.
As for gifts, the income-tax laws say any transfer of money in cash or through a cheque as well as transfer of movable or immovable assets, such as property, shares and securities, jewellery, paintings and sculptures, is considered as a gift. When you transfer a property, you may have to get the transfer registered, which attracts stamp duty and registration charge.
"The Indian tax laws do not contain mandatory provisions to have a gift deed (a registered legal document with appropriate witnesses) in case of transfer by way of gifts. However, it is always preferred to have a gift deed so as to avoid any gift being considered as taxable or being considered as unexplained cash, investments or assets," says Sonu Iyer, partner, tax and regulatory services, Ernst & Young, India.
Though there is no tax on gifts, all gifts in excess of Rs 50,000 (other than those from relatives) and income generated through them get clubbed with the recipient's taxable income. However, income earned by assets gifted to minor children, spouse and son's spouse are included in the income of the donor for taxation.
If you want the money earned to be treated as independent income of your minor children, spouse or son's spouse, you will have to prove that the recipients had used their own acumen for making money from the gifted assets.
It might not be easy to satisfy the taxman that the income through the asset you gifted is not a passive investment income and has been earned independently by your spouse or minor children. So the easiest way of saving tax is by gifting money or assets to your major children and parents who don't have any income of their own.
Let's assume that your parents are senior citizens (above 60) and have no income. You can gift them any amount of cash for investing in high-return instruments such as senior citizen's savings scheme.
As senior citizens do not have to pay any tax for annual income up to Rs 2.5 lakh, the interest income does not become taxable unless it exceeds this exemption limit. This means you can invest up to Rs 25 lakh through each of your senior parents without any source of income if the annual interest or return is 10%. You can invest up to Rs 50 lakh through your senior parents and have a tax-free annual income of Rs 5 lakh.
If your parents are above 80, they are entitled to tax-free income up to Rs 5 lakh per year for "very senior citizen" category introduced in the 2011-12 Union Budget. You can invest up to Rs 50 lakh through each of your "very senior citizen" parents in instruments that give 10% annual return and avoid the taxman for interest income up to Rs 10 lakh earned by both of your parents together.
You can save a total of Rs 3 lakh (30% of Rs 10 lakh earned as interest income) in tax each if you are in the highest tax bracket. So you can invest a total of Rs 1 crore through your parents and save up to Rs 6 lakh in taxes on the interest income of Rs 10 lakh.
If you gift the money to your major daughter for investment, the interest earned from the amount will be taxable only after it crosses the exemption limit of Rs 1.9 lakh annual income.
The income from money invested through your son above 18 will become taxable when it exceeds Rs 1.8 lakh annually. Even when the interest income brings the recipient into the tax net, you still have the advantage of paying less tax then what you would have paid on investing directly.
If you have both parents above 80 and two major daughters, you can invest up to Rs 1.88 crore and have a tax-free income of up to Rs 18.8 lakh.
Even if you don't have major children, you can still save taxes by creating a trust for benefiting your minor children.
"You need to make an irrevocable transfer to the trust, where money cannot be claimed back by the donor. All investments are made through the trust and the income generated can only be used in accordance with the purpose of the trust. The income from the investments is not clubbed with the donor's income, but the trust needs to pay the tax. This method (diversion of income by overriding title) helps reduce the tax liability," says Shuddhasattwa Ghosh, associate director, tax and regulatory services, PricewaterhouseCoopers India.
Now, when you start planning your taxes for the current financial year, make use of this provision to save big on taxes. Make use of the gifting provisions to optimise taxes while making your family financially secure. As you will be giving money on the basis of mutual trust, be sure that the recipient won't take undue advantage of your trust
As per the current laws, any gift received in cash or kind exceeding Rs 50,000 is taxed in the hands of the recipient as "income from other sources". However, this rule does not apply to gifts received from relatives. Additionally, any gift received on the occasion of your marriage, under a will or inheritance is not taxed in your hands.
So who is a relative and what is a gift for the purpose of claiming tax benefits?
"Relatives, for the purpose of taxation, include spouse of the individual, siblings, brothers and sisters of the spouse, brothers and sisters of the parents, and any lineal ascendant or descendant of the individual or the spouse," says Vikas Vasal, executive director, KPMG India.
As for gifts, the income-tax laws say any transfer of money in cash or through a cheque as well as transfer of movable or immovable assets, such as property, shares and securities, jewellery, paintings and sculptures, is considered as a gift. When you transfer a property, you may have to get the transfer registered, which attracts stamp duty and registration charge.
"The Indian tax laws do not contain mandatory provisions to have a gift deed (a registered legal document with appropriate witnesses) in case of transfer by way of gifts. However, it is always preferred to have a gift deed so as to avoid any gift being considered as taxable or being considered as unexplained cash, investments or assets," says Sonu Iyer, partner, tax and regulatory services, Ernst & Young, India.
If you want the money earned to be treated as independent income of your minor children, spouse or son's spouse, you will have to prove that the recipients had used their own acumen for making money from the gifted assets.
It might not be easy to satisfy the taxman that the income through the asset you gifted is not a passive investment income and has been earned independently by your spouse or minor children. So the easiest way of saving tax is by gifting money or assets to your major children and parents who don't have any income of their own.
Let's assume that your parents are senior citizens (above 60) and have no income. You can gift them any amount of cash for investing in high-return instruments such as senior citizen's savings scheme.
As senior citizens do not have to pay any tax for annual income up to Rs 2.5 lakh, the interest income does not become taxable unless it exceeds this exemption limit. This means you can invest up to Rs 25 lakh through each of your senior parents without any source of income if the annual interest or return is 10%. You can invest up to Rs 50 lakh through your senior parents and have a tax-free annual income of Rs 5 lakh.
How you can save on taxes by investing through parents and children
You can save a total of Rs 3 lakh (30% of Rs 10 lakh earned as interest income) in tax each if you are in the highest tax bracket. So you can invest a total of Rs 1 crore through your parents and save up to Rs 6 lakh in taxes on the interest income of Rs 10 lakh.
If you gift the money to your major daughter for investment, the interest earned from the amount will be taxable only after it crosses the exemption limit of Rs 1.9 lakh annual income.
The income from money invested through your son above 18 will become taxable when it exceeds Rs 1.8 lakh annually. Even when the interest income brings the recipient into the tax net, you still have the advantage of paying less tax then what you would have paid on investing directly.
If you have both parents above 80 and two major daughters, you can invest up to Rs 1.88 crore and have a tax-free income of up to Rs 18.8 lakh.
Even if you don't have major children, you can still save taxes by creating a trust for benefiting your minor children.
"You need to make an irrevocable transfer to the trust, where money cannot be claimed back by the donor. All investments are made through the trust and the income generated can only be used in accordance with the purpose of the trust. The income from the investments is not clubbed with the donor's income, but the trust needs to pay the tax. This method (diversion of income by overriding title) helps reduce the tax liability," says Shuddhasattwa Ghosh, associate director, tax and regulatory services, PricewaterhouseCoopers India.
Now, when you start planning your taxes for the current financial year, make use of this provision to save big on taxes. Make use of the gifting provisions to optimise taxes while making your family financially secure. As you will be giving money on the basis of mutual trust, be sure that the recipient won't take undue advantage of your trust
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