Your family can help you save on income tax

But make sure you don’t fall afoul of the income clubbing provisions

It's the tax planning season. While most of us know about the common tax-saving deductions under Section 80C, 80D, 24, etc, not many are aware that your family can help you reduce your tax burden. Rajesh Bansal, managing director, Midas Finserve, a financial services firm says, "Certain income heads can be linked to specific family members in ways that get you tax breaks."

Tax saving via spouse

Leave travel: A person can avail of the benefit of leave travel allowance (LTA) on two trips in a block of four years. Kapil Rana, founder & chairman, Hostbooks Limited says, "If both the spouses are employed, both can together claim LTA for four trips in four years."

Business: Spouses of business persons can help them reduce their tax liability. Vivek Jalan, partner, Tax Connect Advisory Services says, "If you are an entrepreneur or professional and your spouse is also professionally qualified and assists in the business or profession, then you can split the invoices between your firm and the spouse.” Suppose that both the spouses are advocates and work together. Invoices to clients can be split so that both can avail of slab benefit under Income Tax. This would also mean double threshold benefit in Goods and Services Tax (GST). GST is chargeable when the supply of service exceeds ~20 lakh in a year. Gains: A person can claim exemption of ~1 lakh on longterm capital gain arising from the sale of listed equity shares or units of equity-oriented mutual funds on which Securities Transaction Tax (STT) has been paid. Rana says, "Invest in your name and that of your spouse to avail of this exemption every year."

Loan: If you gift money to your wife and she invests it, the income will be clubbed with your income and taxed, unless you have chosen a tax-free instrument like Public Provident Fund (PPF). Bansal says, "Instead, give a loan to your spouse who has no or low income at a reasonable rate of interest."

Tax saving via children

Fees: Section 80C offers tax deduction on tuition fees paid for the full-time education of up to two children.

Loan: If you have taken an education loan for your child, you get a tax deduction under Section 80E on repayment of interest for up to eight years, starting from the year in which interest payment begins. You can also give your child a loan. Rana says, “You can reduce your taxable income by giving an interest-free loan to your children." Investments: Invest in your child’s name in PPF, mutual funds, ULIPS and traditional insurance plans, and avail of deduction under Section 80C. Bansal says, "The income from these instruments will be clubbed with yours and taxed at the applicable rate. To avoid this, invest in tax-free instruments like the PPF. You can also invest in equity mutual funds as there is no tax if the gain is less than ~1 lakh a year." If you have opened a savings account for your child, ~1,500 interest income per child (for up to two kids) will be taxexempt under Section 10(32).

Savings via parents

Rent: If you pay rent to your parents, you can claim the benefit of house rent allowance (HRA). Gopal Bohra, partner, NA Shah Associates says, "To demonstrate that it is a bona fide arrangement, keep the rental agreement, bank statement for payment, intimation to society about tenancy, etc." Investments: If your parents are in a lower tax bracket, transfer money to them and invest in their names. The amount transferred will be a tax-free financial gift. They can invest in schemes like the Senior Citizens Savings Scheme, the post office monthly income scheme, or fixed deposits. Senior citizens get an annual exemption of ~50,000 on interest earned from deposits. Also, the tax exemption limit is ~3 lakh for citizens above 60 years and ~5 lakh for those above 80.

Sell shares to parents: Longterm capital loss can be set off against long-term capital gains. Rana says, "If you have lossmaking shares in your portfolio for more than a year, sell them to your parents through an offmarket transaction (without using the stock exchange). This transaction should be done at the current market price and payment should be done via a banking channel." Parents-in-law: If your parentsin-law fall under a lower tax bracket than you, gift money to them which they can invest. Rana says, "The gifted amount will be tax-exempt in the hands of parents-in-law. Income earned on that investment will be treated as their income and will be taxed at a lower rate."