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Who should invest in the name of parents to save tax? Who should not?

Posted on 15 Nov 2023
Author: Sayan Sircar

Tags: Tax ; NRI

4 mins read
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This article discusses a common tax saving technique of investing in the name of parents to save tax. We also look at the pros and cons.

Who should invest in the name of parents to save tax? Who should not?

This article is a part of our detailed article series on the concept of gifting assets and investing in the name of your relatives. Ensure you have read the other parts here:

Income clubbing: Are you trying to save tax by investing in the name of your parents or wife?

This article explains the concept of income clubbing. It shows how tax saving by investing in the name of family members may not save tax.

Gift tax exemption rules: who can receive gifts that are tax-free?

This article tells you who all can receive gifts of cash, shares, property or any other assets from you without paying any gift tax.

How much money can NRIs gift to parents in India?

This article covers the mechanics for NRIs to regularly send or make one-time large gifts of money to parents in India.

📚 Topics covered:

Investing in the name of parents
Gifting and investing solely to evade taxes
Gifts become the property of the receiver
Special case: NRIs investing in the name of parents in India
- US-based NRIs
- NRIs based out of other countries

Investing in the name of parents

It is standard for children to invest in the name of their senior citizen parents. There are two reasons here:

the senior citizens get higher interest from FDs
the parents are usually in a lower tax bracket compared to the child

There are of course other considerations like creating a safety net for the parents, especially the mother.

Two caveats exist here that may not lead to tax saving or even getting back the entire money:

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Gifting and investing solely to evade taxes

Suppose a son gifts ₹5 lakhs to his mother to make an FD in her name solely to save tax. In that case, the FD interest might get clubbed with the son if the mother returns the entire FD plus interest to the son on maturity. This rule exists to prevent tax evasion.

Gifts become the property of the receiver

Nominee is not the legal heir

Suppose a son, Amar, gifts ₹5 lakhs to his mother to make an FD in her name. This amount becomes the asset of the mother and may be claimed by the siblings of Amar in case of the death of the mother. Since nominees are not legal heirs, even if Amar is the nominee in the FD, it does not automatically mean that only Amar gets the money later. His siblings might make a claim.

The parents also have the option of using these assets for expenses, like say a trip or an unexpected medical situation, for a sibling or anyone else for that matter.

Special case: NRIs investing in the name of parents in India

🇺🇸 FATCA explainer:

As per Wikipedia, the Foreign Account Tax Compliance Act (FATCA) is a 2010 U.S. federal law requiring all non-U.S. foreign financial institutions (FFIs) to search their records for customers with indicia of a connection to the U.S., including indications in records of birth or prior residency in the U.S., or the like, and to report such assets and identities of such persons to the United States Department of the Treasury.

Along with FATCA, tax on global income (is the asset gifted to the parent considered your asset?) and presence of Double Taxation Avoidance Agreement (DTAA) are also important considerations in case you are planning to send money to India for investment.

US-based NRIs

Investing in Indian mutual funds by gifting money to parents in India makes things easy from both FATCA perspective as well as loss of returns due to PFIC rules. However, US tax laws require understanding and study in detail.

The United States levies tax on its citizens and residents on their worldwide income - PwC.com

There are two considerations here:

FATCA compliance will require disclosing assets held in India, above certain thresholds, to the IRS even if they are held in the name of the parents
Limits on Tax-free gifting to family in India. We have discussed this concept here: How can NRIs in the US gift money to their parents in India?

NRIs based out of other countries

These limits on tax-free gifting as well as FATCA does not exist for non-US NRIs. However, such NRIs should carefully consider if they are liable, as per the laws of their country of residence.

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