Optimise Your Taxes by Gifting Money to Your Parents and Children

Making investments in your parents or children’s name and reducing your tax liability is one way of saving money. The income tax provisions exempt gift income from relatives. And the definition of relatives includes any lineal ascendant or descendant of an individual. You can route the income through your family by adopting the below tax optimisation strategies:

1. Investing Through Your Adult Child

If you have children of 18 years of age or older, you can transfer the money or invest in their name. Gifting cash or any sum to your child is exempt from tax. If the child is not earning enough income or is still studying, any income earned on the investments or assets purchased in his name will be taxable in your child’s hands. Hence, if the income earned is below the basic exemption limit, there will be no tax. 

In such scenarios, the income tax liability will be significantly less, or there may be no tax. It is a tax-saving opportunity for those taxpayers whose income is taxable at higher slabs. 

For example, Meena is a 20-year-old daughter of Mr Punit. She is currently pursuing her higher studies. Mr Punit is liable to pay tax on his income at 30% slab as per his total taxable income. Suppose Mr Punit transfers an amount of Rs.7 lakh to her account in a financial year. Meena uses the money for her expenses and invests the balance of Rs.5 lakh in a fixed income generating instrument. She earns an income of Rs.50,000 from such investment in a financial year. The tax liability, in this case, is as mentioned below:

• Mr Punit has transferred Rs.7 lakh to Meena- Meena is not liable to pay any tax on the gift received from her father.
• Meena invests Rs.5 lakh and earns Rs.50,000 in a financial year- The income of Rs.50,000 is taxable in the hands of Meena. The clubbing provisions will not apply in this case because Meena is not a minor. The taxable income of Meena is Rs.50,000, which is below the basic exemption limit of Rs.2.5 lakh. Hence, there is no tax liability.

In the above case, if Mr Punit invests Rs.5 lakh in his name, then he would have paid almost Rs.15,000 (30% on Rs.50,000) as additional income tax.

2. Investing through Parents

Gifting money to your parents who do not earn an income can also help you in tax saving. You can also make investments in your parent’s name and save tax. It is beneficial for parents as they get financially secured, and also income from such investments will give you tax-free annual income. Let us know how to optimise tax in this way.

Consider that your parents are senior citizens (age 60 years or above) and don’t have any earnings. So, for example, if you gift them cash to invest in income-generating instruments, then income from such investments will be taxable only if they exceed the basic exemption limit. You can save tax on income up to Rs.3 lakh from senior citizens and Rs.5 lakh from super senior citizens (age 80 years or above) as per the existing tax slabs for individuals. In the new tax regime, Rs.2.5 lakh is the basic exemption limit for all individuals. In this way, you can make investments in the name of both of your parents and save a significant amount of tax.

Note that there is no mention of documentation of gifts in the Act. However, one can prefer making a gift deed to avoid any amount being considered unexplained cash, assets or investments. 

Hence, you can start planning your tax for the current financial year by using the above strategies. Making tax-efficient choices will help you to maintain or grow your wealth and reduce your tax burden. 

For any clarifications/feedback on the topic, please contact the writer at namita.shah@cleartax.in