No one likes to pay tax on there income as well as savings/ Investments but government impose tax on almost all types of incomes earned by a resident in India. Now when just two months left for the financial year 2012 to end, being a tax payer you must be little worried to know how to save tax on your hard earned money. So if you wish to bring down your tax liability and save tax then here I have lined up some ways which can help you earn tax free income. Lets have a look at all the options and see what option fits in your case and take a help of a professional to implement the same so that there is no scope of mistake and you wont land up in problem in later stage.
Invest through Non-Working Spouse
If you invest through a non-working spouse then he/she can earn a tax free income for you, easy right? You must be wondering if your spouse is non-working then from where she will get income to invest. So here is the answer.
If you gift some money to your wife that gift money will not attract any tax however if the money received from you will be invested by your wife then earning from that investment will be clubbed to the your income and taxed accordingly in that particular year. But earnings will be clubbed only at first level so if she reinvest the earning then that income will not be clubbed to your income in the subsequent years. As the income earned from investment in subsequent years will be your wife’s income not yours.
In place of gifting money to your wife you can even give loan to your wife for the purchase of property. The income received from the property as Rent will then be treated as your wife’s income as long as she will pays you a nominal interest on the loan.
Get Benefits Of Your Minor Childs
If you are having a minor child then you can invest in the name of your child to save tax. As per income tax act 1961, if you invest in bank or some investment scheme for your children then earning from that scheme will be clubbed to your income too but you can avail an exemption of Rs.1500 per year per child for upto 2 children. So this will help you some tax.
Get Benefit of your Adult Child Too
Your adult child can also help you to save tax, say you are having 2 kid of 18 and 19 years old who studies in college. You can gift some money to your children and then invest the money from there account to save tax.
The amount gifted by parents to their children are tax free, so the amount you gift to your children will not attract an tax implications. Even if you invest the gift amount in the name of your children then the income earned from that investment will also not be clubbed to your income.
Once a person turns 18, he/ she is treated as a separate individual for tax purposes. Which simple means the earnings of that individual will not be clubbed to parents income.
Get Benefit of your Parents Also
As a normal adult gets tax exemption on income of Rs. 2 lacs per year, this income is increased for senior citizens means who are more than 60 years old. Senior citizens can earn Rs. 2.5 lacs a year and they don’t have to pay tax on this income.
You can invest in the name of you parents and as like minor and spouse, this income wont be clubbed to your income. If your parents invest in tax saving scheme mention under section 80C then his tax bracket will go upto 3.5 lacs. And if you are having grand parents then their tax bracket in 5 lacs.
Pay Your ULIP Premium
ULIPs are one of the most important thing in your portfolio and many of us buy it but as it cost more then many of us stop using it, if you to had stopped paying premium of your ULIP then you can pay all your premium at one go and save tax, But keep in mind that your policy should not be lapsed.
First check what all charges your ULIP policy attracts, if the charges are nominal and your policy is giving you good returns and your policy offers 10 times the insurance cover then make all the pending premiums as withdrawal from that insurance policy will be tax free in your hands.
Use Indexation To Reduce Tax Burden
Every year government announce a index cost which is based on the inflation in country, this indexation cost can help you to save tax for asset which you had hold. You can either pay 10% flat tax or 20% after indexation.
Using indexation taxpayers have sometimes reduced there tax liability to nil. Although indexation benefit is not available on all sorts of investments, only certain capital assets, including debt funds, FMPs, debt-oriented hybrid funds and gold ETFs, make the cut. Stocks, equity funds and equity oriented 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.
Lets take a example :-
Suppose in 1994-95 you had purchased a property worth Rs. 56 lacs and sold it in 2010-11 for Rs. 80 Lacs then you can pay tax as per flat rate means 10% as :-
(Rs 80 lacs – Rs 56 lacs)*10% = 2.4 lacs
But what if we use Indexation method :-
56 lacs * cost inflation of 2010-11 (711)/cost inflation of 1994-95(259),
So by above its clear if you used Indexation method then you will suffer loss on the sale of your asset and you don’t need to pay tax.
ALSO READ: Capital Gain Tax With Indexation Benefits
Form An Hindu Undivided Family (HUF)
One can also form an HUF to get additional tax exemption and tax deduction under section 80C and 80D.