Seven ways to escape tax legally

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Tax evaders are under more pressure now than ever before. In a bid to curb black money transactions in the country, the government is keen on making benami property laws even more stringent. So, all those asset owners who fail to produce legal proof of source of earning that allows him or her to own the asset, risk it being termed benami.


Here, the term property will mean not just real estate but any kind of movable or immovable, tangible or intangible assets, including jewellery, cash and investments. The new law is likely to state that property acquired in the name of any other person (other than spouse and unmarried daughter)—brother, sister, father, mother, son—risks being confiscated and could lead to jail time.

All 'gifts' given to relatives to escape tax could be probed even more closely by the I-T department. However, no one is stopping you from saving taxes using legitimate ways. Here are seven ways to escape tax legally when investing in the name of family members

1) Invest the gifted money in a tax-free instrument Exhausted your 80C limit? Transfer some money to your non-working spouse or a minor child and invest that sum in a tax-free instrument such as PPF or ELSS funds, tax free bonds and Ulips. The gift tax rules won't apply to these relations, including any of your or your spouse's lineal ascendants or descendants. Therefore, you can transfer any amount you want. Since you are investing in a tax-free instrument, even the clubbing of income clause won't affect your tax liability. 

2) Deduction available in case of minor child You can claim a small deduction of up to Rs 1,500 per child for two children in case of investments made in the name of minors. This means you can invest, say, Rs 15,000 (or Rs 30,000, if you have two children) in a one-year fixed deposit scheme which gives an annual return of 10% and be exempt from tax.

3) There is no tax on long-term gains Not interested in locking your money in long-term investments or fixed assets? Invest the gift money in stocks and equity mutual funds and hold for more than a year. There is no capital gains tax on equity assets held for more than 12 months. In case of gold and property and debt-oriented mutual funds, the holding period is 3 years. 

4) The clubbing is only at the first level If earnings are reinvested, it will be treated as your relative's income. This means the second year onwards, you'll have no further tax liability on that money. You can use this strategy even if your spouse is earning, but falls in a lower tax bracket. 

5) Adult children are big tax savers The clubbing rule does not apply once your child turns 18. Since the person will be treated as a separate individual for all tax purposes, you can transfer money and enjoy another `2.5 lakh basic exemption along with all the other deductions and benefits that any other taxpayer enjoys. What's more, you can start investing if the child is 17 and will turn 18 before 31 March of that financial year and get the benefit for the entire year. 

6) Clubbing not applicable in case of parents You can also invest in your parent's name and the best part is the clubbing rules won't be applicable here. Also, there is no gift tax on the money you give to your parents. So, make use of their a basic tax exemption limit — Rs 2.5 lakh for up to 60 years, Rs 3 lakh for people above 60 and Rs 5 lakh if they are above 80 years of age. In case they are exceeding the exemption limit, help them save taxes by investing in tax-free options.There are huge tax benefits if you live with your parents and the house is registered in their name. You can pay rent to them and claim HRA benefits. Your parents on the other hand can claim a flat 30% of the annual rent as deduction for maintenance expenses such as repairs, insurance, etc., irrespective of the amount of actual incurred expenditure. They will be taxed for only the income above their basic tax exemption limit, which is Rs 2.5 lakh (Rs 3 lakh in case they are above 60 and up to Rs 5 lakh if above 80 years of age). You get a bigger benefit if the house is coowned by your parents. 
Then they can split the earning from rent and show separate tax liability. This taxable money can further be invested in their name under tax-free options such as the Senior Citizens Saving Scheme, five-year bank deposits or tax saving equity mutual funds. You can also consider buying health insurance for up to Rs 25,000 (Rs 30,000 in case they are above 60 years) and claim deductions under Section 80D. 

7) Show the monetary transaction as a loan The clubbing provision is applicable on earnings from gifted money. However, if you show the transaction as a loan where your relative pays you a nominal interest, income from the investment will not be taxable. 

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