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Six Easy Step To Reduce Your Tax Liabilities

CA Vap Patel 
on 07 March 2014

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As 31st March is coming closer, everyone is busy in tax planning. There are many illegal way to avoid tax but why to opt for that when you have many other legal way to reduce your tax liabilities.

Here are the Six most easy way to counter attack with your tax liabilities. Share with your client and friends.

1. USE INDEXATION TO NULLIFY TAX- If  you invest in a debt fund or a debt oriented MIP scheme for three year, they will fetch you around 10% to 10.5% interest income  and by the time when your investment is on the verge of maturity your Indexed cost of acquisition will help you to reduce your tax liability to zero. This benefit will not be available in Bank FD. Example .If you invest Rs 1 Lac on 15Jan 2010  @10.5% interest  p.a. will have maturity value of Rs 1,34,923 on 15 Jan 2013 and at the same time your indexed cost of acquisition will also come around Rs 1,34,923.

2. INVEST THROUGH A NON WORKING SPOUSE- Gift money to your spouse, if this money is invested then any income arise from it will be clubbed with your income. So what is the meaning of gifting? The idea is, tell your wife to reinvest this money now any income on reinvestment   will not be clubbed again with your income because clubbing rule apply only to the first level of income. So Follow Two Simple instruction:

A. Gift Money to your wife then tell her to invest it in Tax free instrument so that when such income clubbed with your income it will have no implication on your Tax liabilities as it is already tax free income.

B. Then reinvest this money. Now income from this reinvestment is treated as your wife income and not yours.

Note: There is another way of escaping clubbing provision. Instead of gifting give your wife a loan to buy property. Rental income from property will be treated as her income as long as she pays you nominal interest on loan.  

3. AVAIL OF MINOR EXEMPTION-  As per Income Tax Act, there is Rs 1500 exemption per child per year up to maximum two child is allowed. So if you have two child then Rs 3000 exemption is available to you. Use this exemption and invest up to Rs 30,000 in Bank FD in your child name. Assuming 10% interest rate you can cleverly divert your Rs 30,000 to tax free income category.

4. TAKE HELP OF AN ADULT CHILD- Gifting money to adult child has no tax implication as no clubbing provision will apply. Any income from gifted money will be of your son only and it will be exempt up to basic exemption limit of Rs 2 Lac. A child over 18 Years can also raise your investment limit in the PPF. You can separately invest up to Rs 1 Lac p.a. in his PPF A/c. whereas in case of minor child, contribution is clubbed with yours and total benefit of Rs 1 Lac can only be available.

5. PARENTS CAN HELP TOO-  If any or both of your parent do not have high income, while you are in the highest 30% tax slab, you can invest in their name to earn tax free income. There is no clubbing provision in case of income arise from gift money given to your parent. Person above 60 years have Rs2.5 Lac basic exemption with Rs 1 Lac 80C deduction it stands at Rs 3.5 Lac. The grey population has wide range of investment option and all of them including Bank FD will fetch around 9.5% return. If you are aggressive investor then simply open demat account in your parent name and any short term capital gain up to basic exemption of Rs 2.5 will be tax free. A caveat makes you the sole nominee of the investment in your parent name. This will ensure that there are no legal disputes with siblings.  

6. FORM AN HUF WITH INHERITED WEALTH- The HUF arrangement especially suits the taxpayers who also have income from ancestral property and expect to inherit financial assets. They will be able to divert the inheritance to the HUF, thus preventing their personal tax liabilities to shoot up. Karta get an additional basic exemption of Rs 2 Lac per year, an additional tax deduction under section 80C and 80D. Remember that this benefit is open only to a Hindu, Sikh, Jain or Buddhist male.

Hence by using this simple technique you can manage to reduce your tax liabilities to great extent. I hope this will work for you and for your clients.

Any question and suggestion are welcome.  


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