Children invest, parents save!

Saving tax is something that every tax paying individual is looking for. There are many ways that can help you save tax. If you are planning to invest money in fixed deposits (FDs), National Savings Schemes or bonds, then you also want to save tax on the returns generated from these instruments.

But if you invest money in your name and fall in 30% tax paying bracket, then surely the interest generated from these investments become taxable.

One way to reduce your tax liability is to gift assets or make investments in your parents and children’s name if they “don’t have any source of income”. Only condition is that your parents should be over 60 years and children should be 18 years or above. However, income earned by assets gifted to minor children is included in the income of the donor for taxation.

What is a gift?

According to income-tax (IT) laws, any transfer of money—from one person to another—in cash or through a cheque as well as transfer of assets, such as property, shares, jewellery, mutual funds, FDs, paintings and sculptures, is considered as a gift.

What is a gift deed?

When you transfer a property, it is better to have the transfer registered legally—called gift deed. This involves stamp duty and registration charges. It is not mandatory to have a gift deed—that is a registered legal document with witnesses. But, it helps you avoid any gift being considered as taxable or being considered as unexplained cash or investment.

No tax on gift received from relatives

According to IT laws, any gift received in cash or kind which is more than Rs. 50,000 is taxed in the hands of the receiver. However, this rule does not apply to gifts received from relatives. You can gift any amount of money to your relatives, which is not taxable to you, if your relatives have no other source of income.

In simple terms, relatives include your parents, children, your brothers and sisters. Relatives also include your wife, her parents and her brothers and sisters.

Therefore, if you gift cash to your parents or children and if they don’t have any source of income, then the cash gift given to them is not taxable. Your parents or children can invest the cash in high yielding financial instruments.

Save tax on gifts given to your parents

Let’s take an example: Your parents are senior citizens (above 60) and they have no income. Let’s assume that you have gifted them Rs. 15 lakh in cash to invest in senior citizen’s savings scheme at interest rate of 9.3% per annum. As senior citizens do not have to pay any tax for annual income up to Rs. 2.5 lakh for financial year 2012-13, 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 at 10% interest rate annually. You can invest up to Rs. 50 lakh through your senior parents and have a tax-free annual income of Rs. 5 lakh.

Save tax on gifts given to your children

Let’s assume: You gift some money to your son—who is above 18 years of age—for investment, the interest earned from the amount will be taxable only after it crosses the exemption limit of Rs. 2 lakh annual income for FY12-13.

Even when the interest income brings the your son into the tax net, you still have the advantage of paying less tax then what you would have paid on investing directly.

Get your child a PAN

Before you begin investing, you should obtain a PAN (permanent account number) card for your child, even if he’s a kid. Once the PAN is allotted, it will act as an identity proof and also make him eligible to access various financial instruments, such as a bank account, mutual funds or demat account.