How to invest in your family’s name? 

Often people invest for family members to save tax. However, there are several factors to consider before doing so, such as: their age and their income tax slab

 

 

Ashwini Kumar Sharma

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The Pension Fund Regulatory and Development Authority (PFRDA) has disallowed any third-party contributions in tier-II accounts of the National Pension System (NPS). The aim could have been to prevent people from temporarily parking their funds in tier-II accounts. NPS has two types of accounts: tier-I and tier-II. Tier-I accounts have a longer lock-in-period, while tier-II are optional and allow easy withdrawal of money. Also, investments in tier-II account do not offer tax benefit.

Often, people invest in the name of family members, either to save tax while investing or to avoid tax on returns at the time of maturity. But there are various rules that need to be considered before doing so. Here’s what you need to know in this regard.

The route to investment

Rules and tax implications differ based on two aspects: one, whether you are investing directly in the name of a family member or gifting the money to your family member, which later gets invested by them. Moreover, tax implication also depends on your relationship with, and the age of, the family member.

Spouse: Many investment instruments such as insurance, Public Provident Fund (PPF), fixed deposits and shares allow investment in the name of spouse. But any return on such investment is considered as income of the proposer and gets taxed accordingly.

Even if you transfer any asset or money as a gift to your spouse, which she later invests, any income from such investment will be treated as yours. However, if she reinvests the returns she earns on the investment, the returns from that investment will not get clubbed with your income because “clubbing provisions apply to only first level of income generated through the asset,” said Vaibhav Sankla, managing director, H&R Block India. So, in the long term, investing in the name of your spouse can help to bring down your tax outgo.

Children: Again, you are free to invest in some avenues in the name of your children. In certain cases, you can also claim tax deduction on the investment amount. For instance, you can invest up to Rs1.5 lakh in PPF in your name and your children’s. But if you want to invest more in PPF, you can open accounts in the name of your family members and invest up to Rs1.5 lakh each in their names too.

But you can claim deduction only up to Rs1.5 lakh, regardless of how much you invest for other family members. Returns from PPF are tax-free. However, returns from other investment instruments could get clubbed with your income, or be counted as the child’s income, depending on the age of your child.

Minor children: In case of minors, clubbing provisions under section 64 of the income-tax Act apply. Any gain from the investment, in the name of minor child, gets added to the income of the parents and is taxed accordingly. However, there is a small deduction available in case you invest the money in the name of your minor child.

You can claim up to Rs1,500 exemption per child every year, for a maximum of two children, under section 10(32). For example, if you choose to invest in fixed deposit, the rates of which are around 7.5% per annum, you can invest Rs20,000 (or Rs40,000, if you have 2 children), which will earn you an interest of Rs1,500, or Rs3,000, respectively. This can be claimed as tax deduction.

Major children: You can gift any amount to a major child, which will be tax free in her hand. Further, if she invests it, any return on such investment will be taxed in her hand and will not get clubbed with the parent’s income, who had gifted the money. This is so because the clubbing provisions do not apply on income from assets transferred to major children.

Even “if the minor is approaching maturity, it makes sense to invest in his or her name,” said Sankla. Once a minor attains the age of 18 , any income derived by her from such investments will be out of clubbing net and will be taxed separately. This can help taxpayers avoid taxes in the future, Sankla explained.

Parents: When it comes to parents, you cannot invest in all the products in their name. For instance: you cannot buy a life insurance policy in which your parents are insured. This is against the insurable interest clause of life insurance. However, you can and should buy a health insurance policy for your parents. You can claim an additional deduction under section 80D of the Act—up to Rs25,000—towards their health insurance premium, and up to Rs30,000 if they are senior citizens.

However, if you are staying in a house owned by your parents, you can consider paying rent to them and claim house rent allowance. But it makes sense to do this only when your parents do not have any other source of income, or if even after considering the rental income their total income falls in a lower tax slab than yours.

All these provisions can help in bringing down your overall tax liability, but only if the other family members’ income is in a lower tax bracket than yours.

So, before investing in the name of any family member, do keep these provisions in mind, as any concealment of tax can lead to penalties.

Ashwini Kumar Sharma

Source : livemint