Tags: U l i ps |stocks |savi ng s |m utual f unds |i nvest m ents |i nterest r ates |i nsu rance |Infl ati on |I ncom eTax | I CI C I|G ol d |f i nan ce |ETW eal t h Seven ways to earn tax-free income Babar Za idi, ET Bureau Feb 4, 201 3, 09.3 8AM 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 inheritan ce tax. Though the latter is not likely soon, the form er 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 taxpay er has the option to pay a 10% flat tax on the long-term capital gains or pay 20% after indexation. Tho ug h th e ra t e i s h ig he r, th e h ig h in fl at io n ha s m ad e i nd exat io n th e be t te r op t io n in th e p ast fe w ye ars. The taxpayers who have a va iled of th is inflat io n indexa t io n bene fi t have been able t o r educe their ta x to nil. In fact, if you invested in a debt fund or a debt-oriented MIP scheme three years ago and earned annualised return s of 10%, your tax liability w ould be zero (see table). RELATED ARTICLES Higher t ax for J Vs with foreig n cos, rules AAR August 9, 2008 Media and entertainment sector needs tax rationalisation... March 6, 2012 Google pays no tax on 1.6 bn pound earning in Britain... December 21, 2009 IN-DEPTH COVERAGE Inherit ance Tax Flat Tax Tax Savers News Stock Qu ot e Ty pe Company Nam e Home News Market s IPO Personal Finance Tech Jobs Opi nion Feat ur es Environment Bl ogs Slideshows Bl ogs ET NOW ET Wealth Mutual Funds Fixed Deposits In su rance Art Loan Centre Credi t Cards Tax Savers NRI Services Sa vings Cent re Ca lcul ators Tax News You a re here: Hom e >Collections >Inheritance Tax Pag e 1 of 4 Seven ways to earn tax- free income - Economi c Times 2/12/2013 http://articles.economictimes.indiatimes.com/2013-02-04/news/36743106_1_tax-laws-flat-...
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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
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