Investing in Parents’ Names

Gifting money or assets to your parents can be an effective tax planning tool if they fall into a lower income tax bracket. Once the gift is made irrevocably, any income earned from that gift is taxed in their hands, not yours.

Example: Rohit, in the 30% tax bracket, gifts ₹10 lakh to his retired father, who invests in a fixed deposit earning 7% p.a. (₹70,000 interest). Since the FD is in his father's name, the interest is taxed in the father’s hands and could even be tax-free if his total income is below the exemption limit.

Investing in Spouse’s Name (Clubbing of Income Rules Explained)

Under Section 64 of the Income Tax Act, if you transfer an asset or money to your spouse without adequate consideration, the income generated from such transfer is clubbed with your income. However, there are exceptions — for example, if the spouse earns money through their own professional skills or if the transfer was made before marriage.

Example: Anita transfers ₹5 lakh to her husband Raj, who invests it in mutual funds. The gains are clubbed with Anita’s income. But if Raj uses that ₹5 lakh to start a freelance business and earns profits from his work, that income is taxed in his own hands.

Investing in Minor Child’s Name

Income from investments made in the name of a minor child (under 18 years) is generally clubbed with the income of the higher-earning parent. However, a small exemption of ₹1,500 per child (up to two children) is available each year.

Example: Karan invests ₹2 lakh in a mutual fund in his 10-year-old daughter’s name. If the fund generates ₹15,000 in a year, ₹1,500 is exempt, and ₹13,500 is added to Karan’s taxable income.

Investing in Major Child’s Name

Once a child turns 18, they are treated as a separate taxpayer. Gifts to adult children are tax-exempt, and any income from such gifted funds is taxed in their hands. This can be an effective way to reduce the family’s overall tax burden.

Example: Meena gifts ₹5 lakh to her 20-year-old son, who invests it in stocks and earns ₹60,000. Since he has no other income, the amount is below the basic exemption limit and hence not taxable.

Key Takeaways

• Document all gifts (preferably via a gift deed) to avoid future scrutiny.
• Ensure gifts are irrevocable to transfer the tax liability legally.
• Use these methods to balance tax efficiency with genuine family financial planning.