In a thriving economy like ours as competitions grows and throws us into a survival of the fittest situation, a quality education and high standard of living is what enables us to sustain and live. With rising education and living costs the working couple needs all the help it can get in order to raise children. Here are a few pointers for Couples with kids.
A medical insurance is a necessity that helps you save taxes. If you buy it only for yourself, you can save up to Rs 15,000, but if you buy it for the whole family (including your parents), you can save up to Rs 40,000.
Under Section 80D, a deduction of Rs 15,000 can be claimed for the health insurance premium and preventive healthcare check-up costs for yourself, spouse and your children. If you decide to protect your parents as well, you get an additional deduction of up to Rs 20,000, if they are senior citizens. Otherwise the regular Rs 15,000 limit is also applicable for your parents. Also, this deduction is available irrespective of whether the parents are financially dependent on the taxpayer or not. So, if your wife is an earning member as well, she can use the same strategy and reduce the taxable income of the family by buying her parents a plan as well.
Exhausted your 80C limit? Gift some money to a non-earning spouse and invest that in a tax-free instrument. There is no upper limit to the amount you can give as your spouse is in the list of specified relatives whom you can gift any sum without attracting a gift tax. However, the taxman is not foolish. If you invest the gifted money, the Section 64 of the Income Tax Act, a provision for clubbing income, comes into play. Therefore, the escape route is by investing in a tax-free option such as a PPF or ELSS scheme.
Also, there is no tax on long-term gains from shares and equity mutual funds. So, if you invest in them in your spouse name and then hold for more than a year, there will be no additional tax liability. What's more? When you re-invested these earnings from the investment, it will be considered the spouse income and you'll have no further tax liability on that money. You can use this strategy even if your spouse is earning, but falls in a lower tax bracket. Similarly, you can also invest in your parent's name and the best part is the clubbing rule won't be applicable here. Also, there is no gift tax on the money you give to your parents. So make use of their a basic tax exemption limit—Rs 2 lakh for up to 60 years, Rs 2.5 lakh for people above 60 and Rs 5 lakh if they are above 80 years of age. In case, they are exceeding the exemption limit, help them save taxes by investing in a tax-free option.
Another way to avoid tax is by showing the monetary transaction as loan. So, for instance, if you buy a house in your wife's name or transfer the second property to her, the rental income from it will not be treated as your income if she pays you a nominal interest on the loan. She can also transfer her jewellery worth the value of the property in your favour. Then also the rental income from that house would not be taxable to you.
Even your fiancee (or, fiance) can help you save taxes. "If a couple is engaged, and the one of them does not have any taxable income or pays tax at a lower rate, her fiance can transfer money to her. The income from those assets won't be included in his income because the transaction took place before they got married," says Sudhir Kaushik, co-founder and CFO of Taxspanner.com. One can give up to Rs 2 lakh (the tax exempt limit) without putting any tax liability on the partner.
You must be already claiming a deduction for the education fee of your children. You can also gift your minor child some cash. But if you plan to invest that amount, the income will be clubbed with that of the parent who earns more.
To avoid clubbing of your child's income, you may invest in tax free instruments such as PPF, mutual fund (MF) or ULIP. Open a minor PPF account in the name of your child and it won't be taxable. However, there is a limitation to this option—the contribution to your own PPF account and that of the child cannot exceed the overall limit of Rs 1 lakh a year. You can buy a child plan from an insurance company or invest in an MF. The premium paid (or investment made, in case of MFs) by you for your child's future qualifies for a deduction under Section 80C of the Income Tax Act, 1961. A private trust for your child can also be created to save tax. There is also a small deduction available in case that investment earns you some money. You can claim up to Rs 1,500 exemption per child per year for a maximum of two children. This means you can invest Rs 15,000 (or, Rs 30,000, if you have two children) in a one-year fixed deposit scheme which gives an annual return of 10%, and be exempt from tax.
The clubbing rule does not apply once the child turns 18 and the person will be treated as a separate individual for all tax purposes. This means, you can transfer money to a major child and have another 2 lakh exemption limit along all the exemptions and deductions any other taxpayer enjoys. So you can freely gift him any amount of money and invest it for tax-free gains. Your PPF limit also increases by another lakh. "You should also transfer all investments made for the child's future—deposits and investments—in major child name," says Kaushik. You can also invest if the child is 17 and will turn 18 before 31 March of that year and get the benefit for the entire year.
If you live with your parents, pay them rent and claim your HRA. However, the house should be registered in their name for you to make this claim. Your parents will be taxed on this. They can claim a flat 30% of the annual rent as deduction is for maintenance expenses such as repairs, insurance, etc., irrespective of the level of actual incurred expenditure.
So, say you pay Rs 25,000 a month, that is, Rs 3 lakh a year, your parents will have to pay tax on only Rs 2.1 lakh. The amount that is over and above the basic Rs 2 lakh exempt limit (Rs 2.5 lakh in case they are above 60 and up to Rs 5 lakh if above 80 years of age), can be invested in their name under tax-free Section 80 C options such as the Senior Citizens Saving Scheme, five year bank fixed deposits or tax saving equity mutual funds. You get a bigger benefit if the house is co-owned by your parents. Then they can split the earning from rent and show separate tax liability.
The tax rules allow you to adjust short-term losses (held for less than a year) from equities against gains. But long-term losses on which the securities transaction tax (STT) has been paid cannot be adjusted against any income. However, if you haven't paid the STT yet, then the sore lemons that have been lying in your portfolio for more than a year can be set off. These long-term losses can be adjusted if you transact outside the exchanges at the existing market rate with simultaneous delivery to the buyer.
The problem is finding a buyer offline and here your family comes in. "Selling the equity investment to a family member can help you book a long-term equity loss by without paying STT and can be adjustment with long-term gains. The sale should be at the market price and the transaction by cheque to avoid confusion. Otherwise the transfer within the family might be treated as a gift," says Kaushik. Spouses can get additional exemptions by creating a trust as per section 164 of the Income Tax Act. A private trust can be created for an unborn son or daughter, or for the future spouse of an existing son or daughter, by allocating funds to the trust through transfer of property, rent of which shall be income of the trust. To conclude... The Income Tax department gives us various avenues to help save tax. Optimally using these avenues and structuring finances sure does provide a great deal of monetary gain.