Saving tax is the main motto of
all taxpayers. While some hire chartered accountants, others pore through tax
laws, or ask friends to find out if there are ways by which they can save.
Actually, the simplest way of
saving tax is by investing through parents and children. If you invest in the
right instrument, the rate of return may be higher as well. Your parents can
help bring down your tax liability in several ways. Here are some smart
strategies that can reduce your tax outgo.
Buy House in Parents name if they
are in a lower Income tax bracket
Every adult enjoys a basic tax
exemption limit. For senior citizens (above 60 years), the basic exemption
limit is Rs 2.5 lakh a year. If any or both of your parents do not have a high
income but you have an investible surplus, you can avoid tax by transferring
money to them which can then be invested in their name.
There is no tax on such gifts and
the income from the investments will be treated as theirs. There are plenty of
options. The Senior Citizen’s Savings Scheme offers an attractive 9.25% per
annum. But the income is taxable and the investor must be over 55 years.
Here’s how you go about it.
Income tax deductions allow senior citizens a tax-free income of Rs 2.5 lakh.
To exhaust this limit, say you gift Rs 28 lakh to each parent in cash. Of this,
both can individually put Rs 15 lakh in a senior citizens savings scheme that
earns a return of nine per cent and pays interest every quarter. Each will get
yearly interest of nearly Rs 1.4 lakh.
If they invest the remaining Rs
13 lakh each in the State Bank of India’s (SBI) fixed deposit (FD) of
eight-years (at an interest rate of 7.5 per cent) that pays interest each
quarter, it will fetch them an income of nearly Rs 1 lakh annually.

That means both parents have
earned Rs 2.8 lakh from the senior citizen saving scheme and another Rs 2 lakh
from SBI’s five-year deposits each year. A total savings of Rs 4.8 lakh – the
tax-free limit (Rs 2.5 lakh) that each parent enjoys. So, they don’t even need
to file tax returns.
The Public Provident Fund offers
tax-free income but there is a limit of Rs 1,00,000 a year. Invest in your
parents’ names if your own limit is exhausted. Or open a demat account in their
name and dabble in stocks. Short-term capital gains will not attract 15% tax if
the basic exemption limit has not been crossed.
This strategy won’t work in the
case of your spouse or minor children. Any amount given to a spouse is tax free
but if it’s invested, the income is treated as that of the giver. Similarly,
income from investments in a minor child’s name is added to the income of the
parent who earns more and is taxed accordingly. No such clubbing provisions
come into play when money is transferred to a parent. There is also no limit on
the amount you can give to your parents. 
Pay them rent if you live in
their house
Do you live in your parents’
house? You can pay them rent to claim House Rent Allowance exemption. This is
possible only if the property is registered in the name of your parent. The
owner will be taxed for the rental income after a 30% deduction. So, if you pay
your father a rent of Rs 3 lakh a year (Rs 25,000 a month), he will be taxed
for only Rs 2.1 lakh.
It gets better if the property is
jointly owned by both parents. Then you can divide the rent two-ways so that
the tax liability gets split between the two parents. If their income exceeds
the basic exemption limit, you can help them save tax by investing in their
name under Section 80C options such as the Senior Citizens’ Saving Scheme,
five-year bank fixed deposits or tax-saving equity mutual funds. 
Sell them shares and offset
Tax laws allow you to adjust
short-term losses from stocks against certain gains. But what if you have been
holding junk stocks in your portfolio for more than a year? If you ask your
broker to sell them, you won’t be able to adjust the long-term capital losses
against any gain.
However, if you sell them through
an off-market transaction where no securities transaction tax is paid, you are
not only allowed to adjust the loss against a gain, but also carry forward the
unadjusted loss for up to eight financial years. That’s easier said than done.
It’s already tough finding buyers for junk stocks on the exchanges. Finding one
for a private deal is infinitely more difficult.
It’s here where your parents can
help you. Sell the junk stocks to them in an off-market transaction. An
off-market transaction is a private deal between the buyer and seller without
the exchange as an intermediary. The losses you book can then be adjusted
against capital gains from other assets such as property, gold, debt funds,
etc. It can also be carried forward for up to eight financial years. Keep a few
things in mind while you go about this. The sale should be at the market price
of the shares and the buyer should pay the sum by cheque. Otherwise, the taxman
might treat the transfer as a gift. 
Buy them a health insurance
This is the simplest and most
commonly used strategy to save tax through your parents. Buy a health insurance
policy for them and get deduction for the premium paid under Section 80D. Up to
Rs 15,000 a year is deductible from your taxable income if you buy a health
insurance policy for your parents. If the parents are senior citizens, the
deduction is even higher at Rs 20,000.

This deduction is over and above
the Rs 15,000 that one can claim as deduction for the health insurance premium
paid for himself and his family (spouse and children). Also, this deduction is
available irrespective of whether parents are financially dependent on the
taxpayer or not.
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