7 ways to save tax

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Seven ways to earn tax-free incomeBabar Zaidi, ET Bureau Feb 4, 2013, 09.38AM IST

Summer is a good two months away, but some of us are

already sweating. And for good reason. North Block has

hinted at a higher tax for the rich and, perhaps, even an

inheritance tax. Though the latter is not likely soon, the

former is a distinct possibility.

What will you do if the finance minister decides to play

Robin Hood with Budget 2013? Evading tax is illegal, but

avoiding it is not. The income tax laws provide enough

opportunities to the savvy investor to bring down his tax

liability. However, this requires intricate knowledge of the tax

rules.

"The options to earn tax-free income have either narrowed down considerably or disappeared in the past few

years," says Neeru Ahuja, partner, Deloitte Haskins & Sells.

Even so, with the right professional guidance, you can legitimately avoid paying tax on the income earned on

your investments.

1. Use indexation to n ullify tax

High inflation has been a curse for investors in the past few years, but for some, it has been a boon. Tax

rules allow investors to adjust the cost of an asset to inflation during the holding period. The taxpayer has the

option to pay a 10% flat tax on the long-term capital gains or pay 20% after indexation.

Though the rate is higher, the high inflation has made indexation the better option in the past few years.

The taxpayers who have availed of this inflation indexation benefit have been able to reduce their tax to nil. In

fact, if you invested in a debt fund or a debt-oriented MIP scheme three years ago and earned annualised

returns of 10%, your tax liability would be zero (see table).

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"We have aggressively used this provision in the tax laws for our clients during the past 3-4 years," says Delhi

-based chartered accountant Surya Bhatia.

Not all investments are eligible for the indexation benefit. Only certain capital assets, including debt funds,

FMPs, debt-oriented hybrid funds and gold ETFs, make the cut.

Stocks, equity funds and equityoriented hybrid schemes don't get this benefit as long-term gains from these

are already tax-free. Bank deposits and bonds are also out. The interest on bank deposits is fully taxable at

the normal rates.

This is why Bhavesh Shah (see picture) wants to shift from FDs to debt funds.

In the highest tax bracket, 30% tax pares the post-tax yield of his FDs to barely 6.5%.

"If my investments can earn 9-10% tax-free, it's an option worth exploring," says the Mumbai-based

businessman.





2. Invest through a non-working spouse

A homemaker's work is never finished. From sending kids to school to shopping and managing the

household, her day is fully packed. Now, add one more task to this long listâ€”investing to earn tax-free

money.

This is not as simple as it appears. If you gift money to your wife, there is no tax implication. However, if this

money is invested, the taxman will club the earning with your income for the year.

The clubbing provision under Section 60 is meant to check tax evasion.

If you are taxed on the income, is there any point in investing in your wife's name? Yes, there is. The clubbing

happens only at the first level of income.

If this money is reinvested and earns an income, it will be treated as your wife's, not yours. "The income from

the reinvested income does not attract the clubbing provision," points out Sudhir Kaushik, chartered

accountant and co-founder of tax filing portal Taxspanner.com.

Here's how you can make this rule work for you. Gift money to your wife and then get her to invest in any of the

several tax-free investment options (see graphic).

The earning will be clubbed with your income, but since these investment options are tax-free, it won't push up

your tax liability. Your wife can then reinvest that money, and this time, the income will not be clubbed.

There's another way to escape clubbing. Instead of gifting, give her a loan to buy property. Rental income from

the property will be treated as her income as long as she pays you a nominal interest on the loan.

Als o read: Salary will empower homemakers

3. Avail of minor exemption

As mentioned earlier, if a parent invests in a minor child's name, the income is clubbed with that of the parent

who earns more. In some cases, a minor child may have a personal income, such as a cash prize in a

competition or payments for commercials and events. However, this is rare and mostly it's the parent who

invests on behalf of the child. There is a small Rs 1,500 exemption per child per year for the income earned by

such investments.

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(Page 2 of 3)

Seven ways to earn tax-free incomeBabar Zaidi, ET Bureau Feb 4, 2013, 09.38AM IST

You can avail of this for a maximum of two children. This means, you can safely invest Rs 15,000 in a fixed

deposit in your child's name. If you have two children, that's Rs 30,000 earning tax-free income every year.

Opt for the annual payout option because the cumulative option will push up the earning beyond the tax-free

limit in a couple of years as the compounding effect comes into play. Tax experts feel the Rs 1,500

exemption per child is too low and should be raised, but there are others who think this should be removed. A

simpler tax structure will encourage greater compliance. The original DTC had proposed the removal of

nearly all exemptions and deductions, but raised the basic exemption limit and tax slabs.

4. Take help of an adult chil d

Rebellious, obdurate, lackadaisical, wasteful ... parents have several adjectives for college-going children.

Allow us to add 'tax-savers' to this list. You can save a neat sum by investing in the name of an adult child.

After a person turns 18, he is treated as a separate individual for tax purposes. This means his earnings are

no longer clubbed with his parent's income and he enjoys the same exemptions and deductions as any other

adult taxpayer.

"Gifting money to a child above 18 and then investing it for taxfree gains is a perfectly legal strategy. You can

gift any amount to your child without any tax liability," says Kaushik of Taxspanner. You don't have to wait for

the child to turn 18 before you embark on this strategy. The rule is that if an individual turns 18 anytime duringa financial year (even on 31 March), he gets the benefit for the entire year. Even those with children aged 16-

17 years can use this strategy. J ust invest in a 500-700 day FMP .

By the time the scheme matures, the child would have turned 18 and the income will be his own. A child over

18 also raises your investment limit in the PPF. You can separately invest up to Rs 1 lakh a year in his PPF

account. In case of minors, contributions are clubbed with that of the parent and the combined total cannot

exceed the annual limit of Rs 1 lakh. "This helps build a capital base for the child for future use," says Delhi-

based chartered acountant Mahesh Agarwal.

By investing in your child's name you also set up an escape route in case the government brings in the

inheritance tax in the future. If the asset is already in the child's name, there won't be any tax. Gifting money

to an adult child and investing in his name is tax-efficient but won't be a great idea if the child is financially

irresponsible. A gift is irrevocable, and once given, there is no looking back. In your attempt to save 10-30%

tax, you could lose 100% of the principal. Being a legal adult, an 18-year-old can also invest in stocks and

mutual funds on his own. The short-term capital gains will be tax-free till the basic exemption of Rs 2 lakh a

year.

RELATED ARTICLES

Higher tax for J Vs with foreign cos, rules AAR August 9, 2008

Media and entertainment sector needs taxrationalisation...March 6, 2012

Google pays no tax on 1.6 bn pound earning inBritain...December 21, 2009

IN-DEPTH COVERAGE

Inheritance TaxFlat Tax

Tax SaversNews Stock Quote

Type Company Name

Home News Markets IPO Personal Finance Tech Jobs Opinion Features Environment Blogs Slideshows Blogs ET NOW

ET Weal th Mutual Funds Fixed Depos it s Insurance A rt Loan Centre Cred it Cards Tax Savers NRI Services Savings Centre Calculators

Tax News

You are here: Home >Collections >Inheritance Tax

Page 1 of 3Seven ways to earn tax-free income - Page 2 - Economic Times




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5. Parents can help too

Your parents can also help you avoid the tax net. If any or both of your parents do not have a high income,

while you are in the highest 30% tax slab, you can invest in their name to earn taxfree income. Every adult

enjoys a basic tax exemption of Rs 2 lakh a year. For senior citizens (above 60 years), the basic exemption is

higher at Rs 2.4 lakh a year. Unlike the investments made in the name of a spouse or a minor child, there is

no clubbing of income in the case of parents. So, a person above 60 can potentially earn Rs 2.5 lakh per year

without any tax implication. If he invests in taxsaving schemes under Section 80C, the income can be as

much as Rs 3.5 lakh a year. In the highest tax bracket, this saves you more than Rs 1 lakh in a year. It gets

even better if you rope in a grandparent who is above 80. Very senior citizens have a basic exemption limit of

Rs 5 lakh. The grey population has a wide range of investment options (see table).

The Senior Citizens' Savings Scheme offers an attractive 9.5% return. All banks and financial institutions offer

senior citizens higher interest rates on fixed deposits. If you are an aggressive investor, open a demat and

stock trading account in your parents' name and dabble in stocks. If their total income is less than the basic

exemption, the short-term capital gains will not attract any tax. A caveatâ€”make yourself the sole nominee of

the investments in your parents' name. This will ensure that there are no legal disputes with siblings. You need

to take extra precautions when it comes to investing through your grandparents because there might be more

legal heirs in the extended family.

6. Revive your fo rgotten Ulip

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