Tax friendly ways to save or invest beyond Section 80

For a majority of taxpayers, tax saving avenues dry up once a home loan is taken and Section 80 limits have been exhausted. Many decide to start investing or purchasing in their spouse’s name. It is also common for parents to open a bank account or a fixed deposit for their little one. But are these tax friendly ways to save or invest? Let’s find out.

Transfer of income to wife

Aditya rented a property owned by him. He asked the tenant to deposit the rent directly in his wife’s account. She used this money for household expenses. Aditya’s wife does not earn any other income. Aditya believes no tax is payable by his wife since rental income does not exceed R2.5 lakh per annum, the minimum amount which is chargeable to tax. However, this income belongs to Aditya and should be included in his return. This addition of income to the rightful owner is called clubbing. Income from this house property owned by Aditya shall be included in his return, even though it is deposited in his wife’s account.

In another case, Swati was employed as a VP in a company where her husband owned 20% of the shares. Salary earned by Swati may be clubbed with her husband’s income. Clubbing applies where a person receives salary or other remuneration from an entity where his/her spouse owns 20% or more shares or is eligible for 20% or more profits. These could be owned individually by the spouse or along with his/her brother, sister or any lineal ascendant or descendant. However, Swati may have earned this income as a result of her skill and qualification. If it can be sufficiently proven that that such skill and qualification has been used to earn this income, such income may not be clubbed.

Minor’s income

Income of a minor is also clubbed with parent’s income. If both parents are working, this income is clubbed with the parent who has higher income. So, if you have parked funds in a fixed deposit for your minor child, its interest income will be taxed in your hands. Income of a minor is almost always clubbed with the parent, unless the minor has earned it out of his own skill or knowledge or where the minor is differently abled. If this is so, you can apply for minor’s PAN and file a separate return.

Transfer of income to parents

Ritu wanted to transfer a fixed deposit of R10 lakh to her mother. Her mother has no other source of income. But Ritu is unsure if this transfer has any tax implications. Any transfer of funds or assets to parents does not lead to clubbing. Interest income from the fixed deposit will be taxed as her mother’s income and shall not be clubbed with Ritu’s income.

This article was first published in The Financial Express on 19 October 2016.

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