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Tax Planning

Many different aspects including timing of income, purchases, selection of investments, types of retirement plans as well as filing status and common deductions

Methods of Tax Planning

Short Term Tax Planning: tax planning thought of at the end of the year to reduce taxable income in a legal way Long Term Tax Planning: planning done at the beginning of the income year to be followed around the year, helps only in the long run, not necessarily in short run Permissive Tax Planning: plans which are permissible by the law Purposive Tax Planning: plans that ensure maximum benefits to the assesse through correct selection of investment, making suitable program for replacement of assets, etc.

7 Ways to Earn Tax Free Income

Use Indexation to Nullify Tax Invest through a Non-Working Spouse Avail of Minor Exemptions Take Help of an Adult Child Parents can Help too Revive your forgotten ULIP Form an HUF with inherited wealth

Use Indexation Benefits

Investors have to pay 10% flat tax on capital gains or 20% after indexation. Though the rate is higher, high inflation has made indexation a better option because it can reduce the tax liability to nil. 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.

Invest Through a Non-Working Spouse

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. But if this money is reinvested and earns an income, it will be treated as your wife's, not yours. Gift money to your wife and then get her to invest in any of the several tax-free investment options. 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.

Avail of Minor Exemptions

There is a small Rs 1,500 exemption per child per year for the income earned by investments made by parents in a minor childs name. 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.

Take Help 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. 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 during a 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.

Take Help of an Adult Child

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. A gift is irrevocable, and once given, there is no looking back.

Parents Can Help Too

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 tax free 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. . If he invests in tax saving schemes under Section 80C, the income can be as much as Rs 3.5 lakh 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.

Revive Your Forgotten ULIP

Most of us have Ulips in our portfolios and many of us have stopped paying the premium. As long as the policy is within the stipulated reinstatement period, the policyholder has the flexibility to pay all the pending premiums at one go and revive the policy. The investors who don't have any pending premiums can use the top-up facility offered by Ulips. They can invest more than the annual premium in the Ulip.

Form an HUF with Inherited Wealth

You can double your exemption and savings limit simply by establishing a Hindu Undivided Family (HUF). This means the karta gets an additional basic tax exemption of Rs 2 lakh per year, an additional tax deduction under Sections 80C and 80D, plus the benefit of


This article was published in The Hindustan Times on 5th April, 2014

Section 80D

Tax deductions under mediclaim policies. Premium paid for medical insurance of self and family members. Maximum amount exempted is Rs15,000. For senior citizens is Rs20,000. If you are paying the premium for your parents you can claim a further maximum deduction of Rs 15,000.

Section 80DD

Paying mediclaim premium of a dependent who is physically handicapped. Dependent can be none other than your spouse, parents, children or siblings. If a person is suffering from 40% of any disability, a fixed sum of Rs50,000 can be claimed in a year. If disability is 80%, the fixed sum can go up to Rs1,00,000

Section 80DDB

Incurred expenses for medical treatment of self/dependent, then you can claim a deduction of Rs40,000 or the actual amount paid, whichever is less. For senior citizen it is Rs60,000 or actual amount paid, whichever is less.

Section 80E

Interest paid on loan taken for higher education for self/dependent. Can be taken for spouse, children or minors of whom you are legal guardian. Applicable for a period of 8 years or the time till which interest is paid, whichever is earlier. Exemption is not applicable for part-time courses.

Section 80G

50% or 100% donations made on philanthropic grounds to trusts, charitable institutions and approved educational institutions qualify for deductions. Include National Defence Fund, Prime Minister Drought Relief Fund, National Foundation for Communal Harmony, National Childrens Fund, etc.

Section 80GG

If a salaried or self-employed person staying in a rented house does not receive any kind of HRA, they can claim a deduction under this section. But this cannot be availed if you, your spouse or your child owns accommodation in India or abroad then you cannot avail this deduction. Claim can be: 25% of total income or Rs 2000 per month or excess of rent paid over 10% of total income.

Section 80GGC

Any monetary contribution to any political party or electoral trust is eligible for tax exemption.

Section 80U

A resident of India suffering from any type of special disability is eligible to claim tax exemption under this section. One should be suffering from not less than 40% of the following diseases: blindness, low vision, mental illness, mental retardation, hearing impairment. Deduction provided is flat Rs 50,000 irrespective of expenses incurred. If illness is severe, a deduction of Rs 1,00,000 can be claimed.

Section 80CCG

Also called Rajiv Gandhi Equity Savings Scheme. Offers 50% tax break to new investors who invest up to Rs 50,000 and whose gross total income is less than or equal to Rs 12,00,000. Use of demat account for the first time to buy notified shares, mutual funds and ETFs.