How Your Family/Spouse/Parents can Help You Save Tax?

Learn more about how your Parents, Spouse and Children can help you save Income Tax?

Your family member can be instrumental in you saving a substantial amount in income tax payments each year.

Don’t believe us? Well, it is true!

All you need to know are the specific provisions whereby such tax-saving opportunities are available to taxpayers.

Listed below, we have specific categories for parents, spouse and children where you can learn how these particular family members can help you take advantage of attractive tax benefits.

Let’s start off with your Parents

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How your Parents can help you save Taxes?

Your elderly parents can also save you from paying a substantial amount in taxes each year. Take a look at the two provisions using which you can take advantage of such savings:

Investing money in your Parents’ names

People aged 60 or older can claim up to Rs.50000 as tax-free interest earnings from bank FDs, savings accounts, post office schemes or more. For everyone else, this limit is much lower at just Rs.10000 a year.

Thus, parking your excess funds in your senior citizen parents’ accounts can reduce your tax liabilities considerably.

The tax rate is also lower for senior citizen taxpayers, enabling them to bear limited taxes even if their income crosses this tax-free slab.

For those aged 80 years and above, the tax-free yearly income slab is Rs.5 lakh, whereas, for people under 60 years, this is just Rs.2.5 lakh.

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Claim HRA by paying rent to Parents

Salaried individuals can reside at their parents’ house and pay rent to them to claim HRA benefits. In such a case, your parents can claim a 30% tax deduction on this annual rent receivable for maintenance and repairs, as per Section 24.

For example,

Annual Rent = Rs.2.4 lakh

Taxable Rent = Rs.2.4 lakh – (30% of 2.4 lakh) = Rs.168000

HRA benefit will be equal to the least of these three provisions:

40-50% of basic salary
Actual HRA offered by your employer
Actual rent paid after subtracting 10% basic salary.

Suppose actual HRA offered is Rs.18000, actual rent is Rs.20000, and basic salary is Rs.22000. In such an event, HRA benefit would be the least of these:

50% of 22000 = Rs.11000
Actual HRA = Rs.18000
Actual Rent – 10% Basic = Rs.17800

Therefore, HRA tax benefit, in this case, is Rs.11000 a year, which you can claim.

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Tax Deductions on Health Insurance Premiums

If you are paying for a health insurance policy for your senior citizen parents, you can claim a tax discount of Rs.50000 per year.

If your parents are younger than 60 years, the maximum permissible exemption is Rs.25000 a year. Both of these come under Section 80D.

Useful Tools to Save Tax

HRA Exemption Calculator

80D Calculator

How your Spouse can help you save Taxes?

Apart from your parents, underage children, your partner can also help you to save a significant sum in income taxes each year. Here is how:

Double Tax Savings on Joint Home Loans

If you and your partner have opted for a joint home loan, each of the co-borrowers is eligible for substantial deductions under Section 80C and Section 24. Section 80C limit is up to Rs.1.5 lakh, and it is based on actual principal repayment.

Under Section 80C = Husband + Wife = Rs.1.5 lakh + Rs.1.5 lakh = Rs.3 lakh total tax exemption on yearly home loan principal repayment.

Under Section 24 = Husband + Wife = Rs.2 lakh +Rs.2 lakh = Rs.4 lakh total tax discount available on yearly interest payment.

Section 24 offers up to Rs.2 lakh per borrower as a benefit on interest payments.

Thus, joint home loans with your spouse can double savings. Keep in mind that such a provision is only applicable in case of self-occupied residences.

Know more about:- Home Loan EMI Calculator

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Tax saving on Financing your Spouse’s Education with a Loan

Section 80E benefits are also applicable if you avail education loan to fund your spouse’s higher studies. Benefits are calculated based on the amount of interest serviced in a given fiscal year.

For instance, if the interest on an education loan for a particular year is Rs.70000 and your taxable income on Rs.5 lakh, after deductions under Section 80E, will be Rs.70,000.

New taxable income = Rs.5 lakh – Rs.70000 = Rs.4.3 lakh

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Gifting your Spouse money to reduce Income Tax Liabilities

Suppose you extend a particular sum of funds as a credit to your spouse. You charge interest on this amount at 5% per annum.

Now, you can ask your partner to invest this loan principal into one of the many investment schemes, where the return rate is higher than 5% a year (say 9%).

In such a way, you bear taxes on your interest earnings from this loan to your spouse. Nevertheless, it is still a profitable move, since your partner earns higher returns from a different scheme.

Keep in mind that your partner would not need to bear taxes on capital earnings if the same does not exceed Rs.1 lakh per year.

Assume,

Loan principal = Rs.50000
Interest rate = 5%
Tenure = 1 year

As a lender, one partner would earn interest of Rs.1364 on which he would need to bear taxes. Now consider that the other partner invests in the following scheme

Investment sum = Rs.50000
Interest rate = 9%
Tenure = 1 year

Interest earnings from this scheme would be Rs.4500. This interest is tax-free, enabling the partners to pocket it without any liabilities.

That’s not all! Your children can also help you to avail increased tax savings.

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How your Children can help you save Taxes?

If you have children, then you are eligible for attractive tax rebates and discounts, which you can determine using an income tax calculator. So, know how your children can help you save tax:

Opening a Bank account for your Children

You can avail up to Rs.1500 as a tax discount on the interest your child acquires from his/her savings account balance, as per Section 10 (32).

This Rs.1500 benefit is available on any income or earning in your kid’s name and not on bank account interest alone.

Keep in mind that this is the upper limit for one child. Thus, if you have three children with bank accounts, the combined tax savings would be,

1500 x 3 = Rs.4500.

Saving Taxes on Education Loan Interest Payment

Section 80E has a provision for parents to save taxes based on the yearly interest payment on their child’s education loan.

For instance, if your taxable income is Rs.4 lakh (after considering all applicable deductions) and the interest payment for your child’s education loan amounts to Rs.1 lakh in that year.

Your actual taxable income = Rs.4 lakh – Rs.1 lakh = Rs.3 lakh.

Keep in mind that this provision can extend up to 8 years from the year when interest payment on an education loan begins.

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Dependent Child with Serious Disease or Disability

According to Section 80DDB, you can claim a deduction of up to Rs.40000 based on expenses related to treating severe diseases in your children.

If your kid suffers from disabilities, you are eligible for a maximum deduction of up to Rs.75000 a year on income taxes.

For example, if a person’s taxable income after all other deductions is Rs.5 lakh. His actual taxable income would be reduced to the following amounts in case of disease or disability of children.

In case of disability, taxable income = Rs.5 lakh – Rs.75000 = Rs.425000

In case of diseases, taxable income = Rs.5 lakh – Rs.40000 = Rs.460000

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Investing in the names of Independent Children

Kids over 18 years are considered independent of their parents, even though most such individuals do not begin earning at such an early age.

At such a time, parents can gift their child money to invest in tax-free investment schemes. Returns from such instruments are considered as income for your kid and not your own.

For instance, a father gifts his 18-year son Rs.50000 to invest in mutual funds. At the end of a year, he claims Rs.55000 from this instrument.

If you acquired an interest of Rs.5000, you would have to bear taxes on the same. However, since this income is in your adult son’s name, no taxes are applicable as he has not yet started earning and is still under the non-taxable bracket.

Acquire Health Insurance for Children

If you are currently bearing health insurance premiums for a medical insurance plan covering your children, you are eligible for tax benefits of up to Rs.1.5 lakh under Section 80C.

Moreover, under Section 10, you can claim an additional Rs.9600 as a rebate on your taxable income if you have two or more children.

Consider your taxable income is Rs.2 lakh. You pay premiums worth Rs.20000 for your kid’s health insurance policy. In that case, your total tax liability would be

Actual taxable income = Rs.2 lakh – (20000 + 9600) = Rs.170400

Tax saving from Tuition Fee, Hostel Expenses and Education Allowances

You can also take advantage of tax-saving opportunities on your children’s tuition fees under Section 80C if you are still to hit the Rs.1.5 lakh upper limit on this provision.

Besides this, you can claim Rs.300 as education allowance each month for up to two children (300 x 12 x 2 = Rs.7200).

Lastly, tax benefit on hostel fees amounts to Rs.100 per child per month for a maximum of two children (100 x 12 x 2 = Rs.2400). These last two provisions are provisions under Section 10.

Saving Taxes by Investing in Mutual Funds, PPF and ULIPs in your Child’s Name

If you invest on your child’s behalf in PPF, mutual funds and other instruments, you are eligible to club the returns from these with your tax benefits under Section 80C.

If the income exceeds the Rs.1.5 lakh rebate, the additional earnings would be taxed normally.

You can instead choose to invest such sums into tax-free schemes, such as PPF.

Returns from such devices cannot be taxed, thereby ensuring significant exemptions beyond just Section 80C.

Consider an example where Mr Verma has a taxable income of Rs.1 lakh. His underage son has income from two distinct instruments, namely PPF and mutual fund. The former earns him Rs.5000, while the mutual funds net a return of Rs.20000.

The PPF earning is tax-free, while the mutual fund earnings will be deducted from taxable income as per Section 80C. Therefore,

Actual taxable income = Rs.1 lakh – Rs.20000 = Rs.80000

Frequently Asked Questions

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What documents are necessary to claim HRA benefits when paying parents rent of more than Rs.1 lakh annually?

In such a case, you would need to submit the PAN card of the property owner (your father or mother). Rental agreement and rent receipts are required for claiming the HRA benefit.

Keep in mind that you cannot claim HRA on a house if you are a co-owner of the property, alongside your parents.

What is the tax-free slab rate for your parents if both are aged over 80 years?

Individuals above 80 years are known as super senior citizen taxpayers.

For these people, the tax-free income slab is up to Rs.5 lakh per year. This means that your elder parents do not need to bear any taxes if their income is within this limit.

What are the maximum tax savings applicable to a child’s education allowance and hostel fees per year?

Parents can claim Rs.300 as an education allowance each month for maximum 2 children. Thus, 300 x 12 x 2 = Rs. 7200 per year as a tax benefit for education allowance. For hostel fees, you can claim Rs.100 per month for maximum 2 children or Rs. 2400 in a year.

Therefore, in a single fiscal year, you can save Rs. 7200 + Rs. 2400 or Rs. 9600 from your taxable income using these provisions.

What is the maximum tax-saving potential for a joint home loan?

In a joint home loan, both borrowers are eligible to avail tax benefits under Section 80C and Section 24.

Thus, each partner can claim exemptions of Rs.2 lakh on interest payment and Rs.1.5 lakh on principal repayment annually. In total, if both partners claim the full benefit, tax savings would amount to Rs.7 lakh.

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