3 Ways Your Parents can help you Save Taxes?

I had written about how investing intelligently on wife’s name can help you save taxes. This time we would be exploring how parents can help you save taxes.

There are 3 ways:

1. Pay Rent to Your Parents:

How Your Parents can help you save taxes?

How Your Parents can help you save taxes?

If you are lucky and stay in your parents house (means the house is on either your mom/dad or jointly held by them) you can pay them rent. It’s perfectly acceptable transaction by Income tax department. The rent you pay to your parents would be added to their income as rental income and taxed according to their tax slabs.

The deal gets even better if the property is jointly registered on both of your parents name as the income from rent would be split between both of them.

Here is an example:
You pay monthly rent of Rs 15,000 to your parents.
Benefit to you: you would get benefit of HRA exemption
Tax on Parents: As the above income would be rental income, here is how the tax on this would be computed:

  • Total Annual Rent – Rs 15,000 X 12 = Rs 1,80,000
  • Standard Deduction @ 30% = Rs 54,000
  • Total Taxable Income from Rent = Rs 1,26,000

So Rs 1,26,000 would be added to your parents income and taxed according to their tax slabs. In case they have no other income then the entire amount becomes tax free.

Also Read: How your Children can Help you Save Taxes?

2. Invest in Parent’s Name

For your parents to help you save tax two conditions should be fulfilled:

  1. Your parents should be paying tax that is in lower tax slab than yours
  2. Since money is involved, there should be enough trust and understanding between you and your parents so that the money can be moved/ invested the way you plan

Technically you can gift money to your parents and it’s not taxable in their hands. So your parents can invest the gifted money from their account. Since they are in lower tax slab than you, they would pay lesser taxes and effectively saving taxes for you.

Here is an Example:

  • You invest Rs 1 Lakh in SBI Bank FD offering 9% per annum for 1 Year.
  • At the end of year you would get Rs 9,000 as interest. If you fall in 30% tax bracket you would need to pay Rs 2,781 as tax and would be left with only Rs 6,219.
  • On the other hand if the money was invested on your parents name you might not pay any tax at all if their total annual income was below the taxable limit of Rs 2 Lakhs. So you can save Rs 2,781.

If your parents are senior citizens then you might also benefit from the extra interest that banks offer on such FDs.
Though the amount seems small in the example but over long run and on higher amounts the tax saving would be substantial.

Similarly, all investments whose returns are taxed on marginal tax rate can be done on your parent’s name.

  • Fixed Deposit in Banks, Companies
  • NCDs, Bonds
  • Debt Funds/ Stocks invested for less than 1 Year which generates short term capital gains and is taxed on marginal rate of interest

3. Buy Health Insurance policy for Parents:

Under Sec 80D on Income Tax a deduction of Rs 25,000 (limit increased in Budget 2015) is deducted if you buy health Insurance for your parents. This deduction goes to Rs 30,000 if either your mom or dad is senior citizen. This deduction is available irrespective of your parent are dependent on you or not.

Also Read: Tax Benefit on Health Insurance u/s 80D

So go ahead and Plan Your Taxes with Your parents!

6 thoughts on “3 Ways Your Parents can help you Save Taxes?

  1. […] How your parents can lower your taxes […]

  2. Firstly I would like to thank you for sharing nice information.

    1) It will be better if you provide clause / section number of the relevant Act.
    e.g. You have quoted that if we invest in the name of minor child, exemption of Rs 1500 is applicable. Mentioning the reference will clear the matter.
    2) If father is a tax payer and mother does not have her own income. Both are senior citizen. Can I invest on mother’s name ?

    3) if any paper work is necessary for gift transaction ?

    4) In case of parents, can we open PPF account in their name ?

    • Hi Hari:
      1. The exemption of Rs 1,500 for income in the name of minor child is given under SECTION 10(32)
      2. Yes you can invest in your mother’s name. The transaction in the eyes of Income tax would be – you gifted your mother X amount, your mother invested it and then on maturity your mother gifted you interest and principal. This is perfectly legal.
      3. It’s a good idea to have records on plain paper for small gift amount, however if the amount is large and you do this very frequently, I would advise you to consult CA
      4. Yes your parents can have PPF account and you can deposit money in the same. No problems in that. But interest on PPF in anyway tax free so this would not help in any additional tax benefit

  3. Ashok Kumar says:

    1.What is the maximum amount can be gifted to parents or spouse ?
    2.Gifting amount will be taxable for us.

    • 1. There is no limit to what you can gift to your parents or spouse.
      2. The money you gift is anyway after tax deduction and there is no further tax on it.

  4. […] In case your parents don’t pay any tax or are in lower tax slab its good idea to pay them rent. This can be good strategy to save tax outgo from family. […]

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