If you invest in stocks and equity funds, you must have earned healthy returns in the past few years. But while the going has been good on the investment front, there is bad news flowing from the tax department. In the past few years, the tax monster has spread its tentacles and started moving into what were considered safe havens till now. Last year, dividends from stocks and mutual funds were made taxable as income.
1. Rent to Parents makes HRA Tax Free
HRA or house rent allowance is the most common allowance received by the salaried. Those who live on rent can maximize on saving tax by claiming a deduction for HRA from the salary.
Every salaried person is provided with house rent allowance (HRA) as a part of emoluments specified in the company contract. If a person lives in a house which is not owned by him/her and he/she pays rent to the owners, the government allows a tax deduction on such rent under section 10(13A) of the Income Tax Act, 1961. Those who live in rented homes and pay monthly rent can save tax under HRA.
You can claim HRA deduction equivalent to the least of the following:
- Actual rent paid
- Basic pay minus 10 per cent of rent paid
- 50 per cent of the salary, if staying in a metro or 40 per cent of the salary, if staying in a non-metro
Documents required for claiming the HRA while staying with Parents
- Rent agreement and rent receipts – Usually employers ask for a copy of the rental agreement for their records. They can also request submission of rent receipts to allow you HRA exemption.
- You can enter into a simple rent agreement with your parents.
- You can prepare rent receipts and also can print these receipts and submit them to your HR/payroll department. You can also download them and save them on your computer.
- It is important to keep proper records in case the assessing officer asks for them.
Benefits of claiming HRA while staying with family
- Save tax as a family – By submitting rent receipts and paying it, you will be able to claim exemption on HRA.
- Your parents can deduct property taxes and also claim 30% standard deduction on the rental income.
- If they are in a lower tax bracket than you, the family can save tax as a whole.
- If they are more than 60 years old, they will also enjoy a higher minimum income exemption limit (Rs.3 lakh for those who are aged above 60 years old and Rs.5 lakh for those who are aged above 80 years old).
- In case they do not have any taxable income, you will be able to save significant tax as a family.
Rules to be aware of
1) You can pay rent to your parents and claim HRA deduction if your parents own that property. But they will have to show the rent as income from house property. But if you are staying with your parents in a rented accommodation and they are paying the rent, you can’t claim the HRA deduction.
2) You can’t pay rent to your spouse and claim HRA deduction.
3) You can claim both HRA and home loan deduction of ₹ 1.5 lakh against principal repayment and ₹ 2 lakh against interest paid, if you are staying in a different city due to job posting.
4) Even if HRA is not part of your salary, you can claim an HRA deduction under Section 80GG. This Section is applicable for those who don’t receive HRA as part of their salary and self-employed individuals.
5) You can claim HRA under this Section by filling up a Form 10BA. You can only claim HRA under this Section only if you are staying in a rented accommodation and paying rent. This house shouldn’t be co-owned by you and also you don’t own any house in the same city.
How to Claim HRA when Living with Parents
Just because you stay with your parents does not mean you cannot claim HRA and does not mean that you have to stay for free. You are legally allowed to pay rent to your parents, brother, and other relatives provided they own the house. However, to prevent any legal inefficiency, you should have a signed rental agreement, rent receipts, and must have paid monthly rent to your parents. Even though paying rent to your parents and claiming HRA appears enticing, a few points should be considered before claiming HRA when living with parents.
2. Invest in Homemaker Wife’s Name
A person has to file an ITR if aggregate of income from all the sources after deductions under chapter VIA like under Section 80 C, 80CCD, 80D, 80G, 80TTA and 80TTB exceeds the amount of basic exemption. The amount of basic exemption in Rs. 2.50 lakh for general category of taxpayers. For those between 60 and 80 it is Rs. 3 lakh and for those over 80 years the basic exemption limit it is Rs. 5 lakhs.
So if the total income of your wife for the whole year, including these short term capital gains, does not exceed the basic exemption limit applicable to her, she does not have to file her ITR. Presuming that she has other incomes also and if her total net taxable income including such short term capital gains does not exceed ₹5 lakh during the year, she even does not have to pay any tax as long as her aggregate tax liability does not exceed Rs. 12,500 due to rebate available under Section 87A.
Please note that the rebate under Section 87A is not available against tax liability in respect of long-term capital gains on listed shares and equity oriented schemes during the year.
Presume that the investments in shares were made out of her own savings. However, in case the investments were made out of money gifted by you, the income earned by her shall be clubbed with your income year after year till the marriage subsists. The clubbing provisions will not apply in respect of income earned on the income already clubbed once.
3. Utilise Exemption for Senior Citizens
India’s income tax law pampers senior citizens and very senior citizens with several tax benefits. Only residents of the country can avail of these special benefits. A person between 60 years and 80 years of age is termed as a ‘senior citizen’ and a person above 80 years of age is a ‘very senior citizen.’ Income tax benefits available to resident senior and very senior citizens range from higher exemption limit to deductions under various sections on account of medical expenses and interest earned on deposits.
Every individual who is earning is required to pay income tax as per the income tax slab. Certain exemptions are also provided by the government on the tax. However, senior citizens and a very/super senior citizen are granted a higher exemption limit as compared to normal taxpayers.
The exemption limit for the assessment year 2021-22 available to a resident senior citizen is Rs 3,00,000 while for non-senior citizen it is Rs 2,50,000. A very senior citizen is granted a higher exemption limit compared to others. The exemption limit for the assessment year 2021-22 available to a resident very senior citizen is Rs 5,00,000.
Higher Exemption Limit
Senior citizens and very senior citizens are granted a higher exemption limit as compared to normal or non-senior citizen tax payers. Exemption limit is the level of income up to which a person is not liable to pay tax to the government.
For FY 2020-21, exemption limit for a senior citizen is ₹3,00,000. The exemption limit for non-senior citizen is ₹2,50,000. An additional benefit of ₹50,000 in the form of higher exemption limit is available to a resident senior citizen as compared to normal tax payers.
A very senior citizen is granted a higher exemption limit of ₹5,00,000.
Exemption from Paying Advance Tax
As per section 208, every person whose estimated tax liability for the year is ₹10,000 or more, shall pay his tax in advance, in the form of ‘advance tax’. However, section 207 gives relief from payment of advance tax to a resident senior citizen. As per section 207 a resident senior citizen not having any income from business or profession, is not liable to pay advance tax.
4. Invest in NPS but not in Annuity
The NPS is a voluntary retirement scheme through which you can create a retirement corpus or your old-age pension. It’s managed by PFRDA (Pension Fund Regulatory and Development Authority) and available to all Indian citizens (resident or non-resident) between 18 and 65 years old.
On maturity, which is when you turn 60, 60% of your corpus is transferred to your bank account, while the remaining 40% you have to buy an annuity product necessarily. So what is an annuity, and why you need to buy it? Let us tell you all about it.
What is an Annuity?
An annuity is a type of financial investment that pays out a fixed and regular dividend. These are long-term contract from an insurance company where you invest your money in return for an income in the form of regular payments. You could also understand their structures if you reverse the way life insurance products are structured. Just the way you pay regular premiums in a life insurance policy, in case of annuities, you receive regular payments. Likewise, if life insurance protects you against the risk of early death, annuities protect you against the risk of living for long.
Annuity Options under NPS
When it comes to the NPS directed annuity scheme, the current choice is limited to 7 approved annuity providers (ASPs) (See: PFRDA approved annuity service providers for NPS). You will have to choose one annuity provider at the time of NPS account maturity. The annuity amount you get will depend on the prevailing annuity rates.
While checking the immediate annuity rates, do not confuse it with bank FD rates, because a 6.5% immediate annuity for a 60-year-old for 10 years is not the same as 6.5% FD return. The FD return is one time, whereas the annuity payout is for a 10 year period. So, do look deeper when you are checking the annuity rates.
Annuity and Taxation
All things good come with a downside and so do annuities. Annuity rates are not very transparent or easy to follow. Just the way insurance premiums vary across insurers for the same amount of cover and tenure; so does annuity. The annuity rates across insurers vary, and it may be a good idea to shop for offers before zeroing down.
Likewise, the tax treatment on annuities also needs to be factored. There is no tax incentive with annuities, as the annuity that one received is treated as income and taxed according to the slab rate that one falls in. However, as there is little choice for NPS subscribers at the time of maturity, they have to opt for an annuity with 40% of the corpus at the time of redemption.
In the absence of suitable alternatives, an annuity does work for people looking for a fixed and regular income in retirement. The predictable cash flow serves the purpose for many, and they can use their other savings and investments to counter rising expenses and other factors impacting their cost of living. Your objective when taking an annuity should be to achieve income protection over the long term rather than the growth of the principal. If a fixed income is your priority in retirement, an annuity could be the product to depend on.
5. Invest in Adult Children’s Names
If your child’s age is 18 years or above, he will be liable to pay tax on any income he earns, i.e. clubbing rules will not apply and his income will not be added to yours. If he falls in tax-exempt income category and you gift him money that he invests in tax-free instruments, the income thus earned will be tax-free. After 18, one is treated as a separate individual for tax purposes. His earnings are no longer clubbed with his parent’s income. Save tax by investing in the name of the adult offspring.
As per income tax rule, an adult with age above 18 years is considered as an independent entity. The income earned by an adult child is not clubbed with their parents. So, if your adult child does not have any income, you can invest money on his/her name and save tax.
Before investing money in the name of your adult children, you should assess his/her behavioral and legal aspect. As money is put on their name, they are the legal owner of the money. They may refuse to return the money at a later stage or may liquidate the same.