Understand financial needs of parents before allocating assets for them
Many people today have children and parents to look after. There are big differences in how you must invest for them
I want to gift my 55-year-old mother Rs20,000 per month. Where should I put this money?
There are prima facie two issues that need to be addressed here. First, whether we can gift to family members (including mother) and second, how should you invest the said amount on behalf of your mother, subject to her utilisation.
The Income-tax Act under Sec. 56(2) defines who is a relative and who are the specified relatives to whom, if we give gift for amount exceeding Rs50,000 (without consideration), it still does not become a taxable income in the hands of donee (receiver). The list is exhaustive and includes the following: spouse of individual, brother and sister of individual as well as spouse of individual, brother and sister of either of the parents of individual, any lineal ascendants or descendant of the individual or of the spouse of the individual. Hence, any transfer to mother without any consideration will be treated in the hands of mother as a tax-free receipt. However, it is good to create a document, i.e., a gift deed to establish the credibility of transaction.
And to answer the second part, i.e., investments—it is important to understand the need of funds as distribution of asset allocation will be made accordingly. Assuming that at her age liquidity becomes the most important issue, followed by safety and then will come the returns generated by the investment. So, investments like fixed deposits and short-term debt mutual funds are good options. Also, as the corpus is to be invested for long term and your mother’s current age is 55 years, asset classes that protect from inflation also become important and hence it is prudent to consider a limited exposure to equities. Here, monthly income plans (MIPs), which take equity exposure anywhere between 5-30%, and hybrid mutual funds that have an average exposure of 70% in equities, can also be considered. The investment strategy can be further fine-tuned by having an understanding on how important is the tax efficiency as well as whether any regular income is required from such investments.
We have a small piece of land on the outskirts of Delhi and it was transferred in my name recently. I am 43 years old. I plan to construct apartments on it and rent them out. Rental from the three apartments would be about Rs25,000 each. I also have a regular job from which I earn about Rs1 lakh per month. Can I set up an HUF for that house? Can you please explain the pros and cons of setting it up?
What you want to do is tax planning. But in the pursuit of tax planning, you need to ensure that you don’t end up doing any tax avoidance. You need to understand what an HUF (Hindu Undivided Family) is. Here the assets are owned by the complete family represented by Karta and its coparceners and members. As the assets and income are not owned by one person, the taxation is also for the family and hence, it acquires the status of a separate legal entity and thus the HUF is required to file its own income tax return and hence a PAN is required. And this becomes one of the primary reasons why individuals prefer to create an HUF: to create a separate tax entity thereby resulting in tax efficiency. In your case, the property has already been transferred in your name and hence it is no more an ancestral property. The basic requirement to create an HUF is capital creation, and it can be in the form of ancestral property, assets gifted by relatives or even friends (there is a limitation on how much gift friends can give without tax incidence), or received by the HUF itself through a Will. In case the land has been retained as ancestral property, then the land could have been transferred to HUF. But then the next problem would have been the construction of the three floors, as the funds are to be generated by the HUF as you cannot transfer your own funds to the HUF.
I am planning to buy a car. I am told that if my wife is the first applicant in the car loan, we could get a preferential rate of interest. However, my wife does not have a driver’s license. Can I buy the car in her name?
Yes, you can buy a car in your spouse’s name. What is really important is to fulfil the basic criteria for taking a car loan, i.e., proof of income, identity proof and residence proof. Getting a good credit rating is also an important factor for getting a good interest rate. And as far as driving licence is concerned, it is a prerequisite for driving any car in India. So while a car can be purchased by your wife but till she does not acquire a driving licence, she is not legally permitted to drive the car.
Surya Bhatia is managing partner at Asset Managers.
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