Bring down your TAX liability

With the time approaches to financial year end, everyone seems to be worried about their TAX planning.

Not many of us knows that we can reduce our tax liability via our parents.

Here are four smart strategies that can reduce your tax outgo. 

1 Invest in their name if they are in a lower tax bracket 

Every adult enjoys a basic tax exemption limit. For senior citizens (above 65 years), the basic exemption limit is Rs 2.4 lakh a year. If any or both of your parents do not have a high income but you have an investible surplus, you can avoid tax by transferring money to them which can then be invested in their name. 

There is no tax on such gifts and the income from the investments will be treated as theirs. There are plenty of options. The Senior Citizen’s Savings Scheme offers an attractive 9% per annum. But the income is taxable and the investor must be over 55 years. 

The Public Provident Fund offers tax-free income but there is a limit of Rs 70,000 a year. Invest in your parents’ names if your own limit is exhausted. Or open a demat account in their name and dabble in stocks. Short-term capital gains will not attract 15% tax if the basic exemption limit has not been crossed. 

This strategy won’t work in the case of your spouse or minor children. Any amount given to a spouse is tax free but if it’s invested, the income is treated as that of the giver. Similarly, income from investments in a minor child’s name is added to the income of the parent who earns more and is taxed accordingly. No such clubbing provisions come into play when money is transferred to a parent. There is also no limit on the amount you can give to your parents. 

2 Pay them rent if you live in their house 

Do you live in your parents’ house? You can pay them rent to claim House Rent Allowance exemption. This is possible only if the property is registered in the name of your parent. The owner will be taxed for the rental income after a 30% deduction. So, if you pay your father a rent of Rs 3 lakh a year (Rs 25,000 a month), he will be taxed for only Rs 2.1 lakh. 

It gets better if the property is jointly owned by both parents. Then you can divide the rent two-ways so that the tax liability gets split between the two parents. If their income exceeds the basic exemption limit, you can help them save tax by investing in their name under Section 80C options such as the Senior Citizens’ Saving Scheme, five-year bank fixed deposits or tax-saving equity mutual funds. 

However, this tax-free window will become smaller next year after the proposed Direct Taxes Code (DTC) comes into effect from April 2012. The DTC has proposed to bring down the 30% standard deduction on rental income to 20%. This would push up the tax liability of the senior citizens who receive rent from property. Also, many of the existing tax saving options will no longer be available under the DTC regime. 


3 Sell them shares and offset losses 

Tax laws allow you to adjust short-term losses from stocks against certain gains. But what if you have been holding junk stocks in your portfolio for more than a year? If you ask your broker to sell them, you won’t be able to adjust the long-term capital losses against any gain. 

However, if you sell them through an off-market transaction where no securities transaction tax is paid, you are not only allowed to adjust the loss against a gain, but also carry forward the unadjusted loss for up to eight financial years. That’s easier said than done. It’s already tough finding buyers for junk stocks on the exchanges. Finding one for a private deal is infinitely more difficult. 

It’s here where your parents can help you. Sell the junk stocks to them in an off-market transaction. An off-market transaction is a private deal between the buyer and seller without the exchange as an intermediary. The losses you book can then be adjusted against capital gains from other assets such as property, gold, debt funds, etc. It can also be carried forward for up to eight financial years. Keep a few things in mind while you go about this. The sale should be at the market price of the shares and the buyer should pay the sum by cheque. Otherwise, the taxman might treat the transfer as a gift. 

4 Buy them a health insurance policy 

This is the simplest and most commonly used strategy to save tax through your parents. Buy a health insurance policy for them and get deduction for the premium paid under Section 80D. Up to Rs 15,000 a year is deductible from your taxable income if you buy a health insurance policy for your parents. If the parents are senior citizens, the deduction is even higher at Rs 20,000. 

This deduction is over and above the Rs 15,000 that one can claim as deduction for the health insurance premium paid for himself and his family (spouse and children). Also, this deduction is available irrespective of whether parents are financially dependent on the taxpayer or not. 

The tax-saving potential of this option too will shrink after the DTC comes into effect in April 2012. It has proposed to reduce the deduction for health insurance, life insurance and tuition fees for children to a combined limit of Rs 50,000. That would be a setback for those looking for tax savings from health and life insurance. 

But it should not keep you from buying a health insurance cover for your parents. After all, they looked after your needs when you were a child. Now it is time you repay that debt. 

New Trend in Property: Assured Return

Now a days Real estate developers come up with unique offer to Lure customers which is "Assured Return From Property. Cash-crunched developers are offering “assured” rentals in the range of 6-12% of the property value annually plus free maintenance. 

The trend was earlier limited to commercial projects and small developers is now increasingly being used even by bigger ones for residential complexes. Developers in the western part of the city are offering a different kind of deal than the builders in the north. 

Here is one example - US-based writer Sharmishta Chakravorty is one interested buyer. Her requirement: “We come to India once in two years. And that too for a couple of weeks. We are not comfortable staying with relatives and so want to buy a house. But our dilemma is its upkeep and finding tenants,” she says. 

This is where realtors such as Royal Palms Estate step in. At the time of signing the contract, the company issues quarterly post-dated cheques to buyers. During the tenure of the contract, the possession of the house remains with Royal Palms Estates and the company in turn rents or leases it to its corporate clients. 

“The property is priced in the range of Rs 4,000-6,000 per sq ft. After two years, the buyer has the option of renegotiating the contract,” says Dilawar Nensey, joint managing director, Royal Palms Estates. 

Disha Direct, which has developed a seaside resort on the outskirts of Mumbai, offers 6% of the property value annually as rent to buyers. “Our villas cost Rs 60 lakh. Besides guaranteed rentals we also take care of the maintenance,” says Santosh Naik, the company’s managing director. Disha’s villas are rented out to weekend visitors. The company also allows the buyer four weeks of free stay during the tenure of the contract, which is for a period of 10 years. If the buyer wants to cancel the contract he has to give a month’s notice. 

In north India, property developers offer another form of guaranteed returns. Investors are asked to become partners in projects. As an investor, you are required to put in a certain sum as down payment and the developer usually offers a return of 20-30%. After the project is complete, the builder offers you a choice of a plot of land or a unit in the project or your money back. In some cases, the builder also hedges his bets in case the project actually does well by only promising a preferable allotment when the project is complete. 

But as every coin has two sides, same is the case here:

The catch 

However, realty experts say that “guaranteed-returns” schemes are mere gimmicks by developers to push up sales. “How can a developer give guarantees? Factors such as connectivity, proximity to the market area are taken into consideration before the rental of an area is decided,” says Pankaj Kapoor, managing director of Laises Foras, a realty research firm. 

Kapoor’s views are echoed by Pawan Swamy, managing director (west India), Jones Lang LaSalle India, a real estate services firm. “Rentals depend on location and project specifications among other parameters. It is not possible to offer guarantees on rents at the marketing stage. Buyers should be guided purely by facts and not assurances,” he says. 

There are other traps in these schemes also. In some cases, only after you make the down payment will you be told about the fine print. In others, since it is a pure investment, you may get the returns only if you share the property with others. While your stakes in proper maintenance and upkeep of the property are higher, it is the developer who chooses the tenants. 

Developers disagree. “Rather than take costly debt and pay heavy interest, we prefer to pass on the benefit to the customer who gets regular returns as well as capital appreciation,” says Nensey. 

These are not the only issues. The realtor does not sell the entire project under the assured rental mode because he may not be able to guarantee 100% occupancy. Typically, this arrangement is only for about 25% of the project size. This means that if you do have an issue with the developer you will only have a handful of investors to support you. 

In most cases, a developer is cash-strapped. So it is likely the project will be delayed. Also, a developer may not have all permissions. And since you are a partner, he may want you to share some expenses to complete the project. You can of course drag a developer to court. But few would want to get entangled in a web of legal tape. Don’t fall for the guaranteed-rental bait. Read the fine print and talk to people who have already invested in projects before you sign on the dotted line.

Excerpt from Economic Times