For the financial year 2013-14, an individual taxpayer’s taxable income (other than capital gains) above Rs. 10 lakhs is taxed at 30.9%. The individuals who are in the highest tax bracket would naturally want to shift some of their income to other family members who are in a lower tax bracket and pay tax at a lower rate. If the other family members are in 0% tax bracket they would actually not pay any income tax.
No matter how good it may sound; unfortunately, such an option is not available under the tax laws. Therefore, generally you cannot shift your salary income to your parents and let them pay income tax on it at a lower rate.
However, there is some good news. Certain types of income can be shifted to other family members by using a tool called ‘Gift’.
For example, a tax payer in the highest tax bracket has a fixed deposit of Rs. 50 lakhs, and annually earns interest of Rs. 500,000. He would pay Rs. 154,500 as income tax on the interest income.
The taxpayer’s mother, a homemaker, does not have any taxable income. The taxpayer can gift Rs. 50 lakhs to his mother. His mother would then annually earn interest income of Rs. 500,000. If the taxpayer’s mother is over 80 years of age, she will not be required to pay any income tax on the interest income as income up to Rs. 500,000 is exempt from income tax. However, if taxpayer’s mother is over 60 years of age (but below 80 years of age) then she would be required to pay income tax only to the tune of Rs. 15,450. This is because income up to Rs. 250,000 would be exempted from income tax. Additionally, it is assumed that she would claim deduction of Rs. 100,000 under section 80C by making some tax saving investments which would reduce her taxable income to Rs. 400,000.
As you can see, by using the tool of gift, the income tax liability (on the interest income) is reduced from Rs. 154,500 to Rs. 15,450 (or nil in some cases).
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