Do you help your parents financially? I mean do you send money to your parent(s) on a regular basis? Or do you sporadically send them money when they ask for it? Or do you send money when they have big medical expenses or they wish to travel or do some major repair at home?
Well, I do know of many people doing this—and the smartest way of doing this is to transfer big chunk(s) of money to them so that they can invest it and earn the money in their own name. You can even transfer some assets like bank fixed deposits to them. I mean transferring assets to them instead of transferring money for their expenses.
Say you are 40 years old with a 63-year-old mother and an 83-year-old grandmother, and they are staying together with your mother hiring help to look after your grandmother. The best thing to do is to transfer Rs 10,00,000 to your grandmother and Rs 10,00,000 to your mother. Of course it could even be your parents instead of it being your grandmother, but just a reminder that even the earlier generation could need financial support.
What they should do with the money is simple. They should then put it in the Senior Citizens saving scheme and earn say 7% tax-free (assuming they do not have taxable income EVEN after this income of Rs 70,000). At the current interest rate scenario, this is very useful because this Rs 20 lakh will not have any clubbing or have any other tax implications. Of course, I am assuming that Rs 70,000 is what they need from you. If they need more income, simply transfer more capital. This is very efficient from the Income Tax point of view.
No point in earning money, paying tax, and then giving away that money for expenses. Instead let the capital be given away so that the person who wants it earns it herself. I am assuming that you are earning (say) Rs 35 lakh and are taxed at a high bracket, while your mother and grandmother do not have any other sources of income.
One more important thing to do is to automate all their expenses—mobile, landline, electricity, gas, society charges—put it on a credit card, and make sure that the bills are paid on time. Also do that for your own expenses—rent, (if you had an EMI it would be a direct debit), gas, telephone, society charges, children’s fees, children’s hobby classes (quarterly?)—you save a lot of trouble and about 50 cheque leaves a year, if not more! Of course, if you are not the only child, make sure that you tell the other siblings about this, and make yourself the second holder. Make sure that your spouse is either the 3rd holder or at least the nominee.
There is another option that is available to you, especially if you have a lump-sum to invest. You can put it in a ultra-short bond fund or a corporate bond fund. Obviously this should be a debt fund with a 2-year duration, and you should be willing to top it up once in 3 or 4 years or as the need arises. They should then do a systematic withdrawal as per their requirement.
Financial advice
PV Subramanyam writes at www.subramoney.com and has authored the best seller ‘Retire Rich - Invest C 40 a day’