Investing through parents and children is one of the easiest ways of saving taxes. If you invest in the right instrument, the rate of return may be higher as well. Your parents can help bring down your tax liability in several ways.
By Paying Rent to Parents to claim HRA or Section 80GG deduction:
This option is mainly for those having Salary Income and receiving House Rent Allowance and living in parents’ house. You can pay them rent to parents to claim House Rent Allowance exemption. This is possible only if the property is registered in the name parents.
If Property is jointly owned by parents than you can divide rent between them by paying them separately so that the tax liability gets split between co-owners. 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.
Further those not having salary Income can claim deduction U/s. 80GG but in this case Maximum allowable deduction is Rs. 2000/- Per Month.
Section 80GG dealing with deduction on rent paid where the taxpayer doesn’t receive HRA, specifically mentions that the taxpayer or his or her spouse/ minor children should not own any residential accommodation where the taxpayer resides, performs the duties of his office or employment or carries out his business.
Restrictions to this technique?
Likely to say for every rule there are some do’s and don’ts which need to be complied before applying to any situation. The same applies with this thought also, a taxpayer need to study some basic limitations before applying this exemption to practical use as:
Property accommodated should be registered in name of parents
Payment of rent to parents is to be done through a bank account transaction as the same can inspected by an assessing officer.
If a deduction is claimed by an employee in this section, then no further deduction would be available as provided in Section 80GG
For any repairing or maintenance charges no further deduction would be available.
Payment of rent made to spouse cannot be claimed under this section.
If an employee is residing in a rented house with parents and rent of house is paid by parents then the same could not be claimed as a deduction.
If employee has its own house in the same city and is using it for rental income, then he cannot claim the above deduction.
An employee can use this advantage in a limited way, but it is important to discuss the concept more in detail with an expert before applying to any such exemption, as a small mistake done in aforesaid rule might end up resulting in some big penalty.