Seven ways to earn tax free income
7. Form an HUF with inherited wealth
A lot of taxpayers are clamouring for raising the Rs 2 lakh basic exemption limit and the Rs 1 lakh tax-saving limit in the forthcoming Budget. But very few know that they can double their exemption and savings limit simply by establishing a Hindu Undivided Family (HUF). The tax authorities treat the HUF as a separate entity. It is entitled to the same exemptions and deductions as any other individual taxpayer. 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 lower tax slabs. As our calculation shows, one can substantially reduce one's tax liability through this tax planning tool. Not everyone can avail of this benefit. This option is open only to a Hindu, Sikh, Jain or Buddhist male. Besides, he should be married. "A family comes into existence only when a person marries. So marriage is a prerequisite for forming an HUF," says chartered accountant Mahesh Agarwal. 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 liability to shoot up.
It may not be helpful for someone with low income. You may need the help of a professional to get you started. He might charge a fee, but it will be money well spent. A simple cost-benefit analysis will tell you that if spending Rs 8,000-10,000 can save you Rs 1-2 lakh in tax, it's not a bad deal. Remember not to take this route if you are not confident of compliance with the rules. As the karta of the HUF, you are responsible for its financial affairs. A lot of people find it tough to manage their own tax planning. Imagine what will happen if they are expected to do it for their HUF as well. But if you can, make use of this option to cut tax. ET Wealth spoke to tax experts and other professionals to identify seven such windows of opportunity to earn tax-free income. Some of these, such as distribution of income and investing through family members, are well known. Yet, there are intricacies that need to be kept in mind, such as the clubbing provisions when you invest in the name of your spouse or minor child. A word of caution. Not all of these strategies will work for all investors. Investing through your spouse will not be beneficial if she is in the same tax bracket as you. Gifting money to an adult child won't be a great idea if he is irresponsible with money. In some cases, indexation may not be the best option. If you sell gold ETFs bought five years ago, a 20% tax after indexation would be higher than a flat 10% tax on profit.
It may not be helpful for someone with low income. You may need the help of a professional to get you started. He might charge a fee, but it will be money well spent. A simple cost-benefit analysis will tell you that if spending Rs 8,000-10,000 can save you Rs 1-2 lakh in tax, it's not a bad deal. Remember not to take this route if you are not confident of compliance with the rules. As the karta of the HUF, you are responsible for its financial affairs. A lot of people find it tough to manage their own tax planning. Imagine what will happen if they are expected to do it for their HUF as well. But if you can, make use of this option to cut tax. ET Wealth spoke to tax experts and other professionals to identify seven such windows of opportunity to earn tax-free income. Some of these, such as distribution of income and investing through family members, are well known. Yet, there are intricacies that need to be kept in mind, such as the clubbing provisions when you invest in the name of your spouse or minor child. A word of caution. Not all of these strategies will work for all investors. Investing through your spouse will not be beneficial if she is in the same tax bracket as you. Gifting money to an adult child won't be a great idea if he is irresponsible with money. In some cases, indexation may not be the best option. If you sell gold ETFs bought five years ago, a 20% tax after indexation would be higher than a flat 10% tax on profit.
Source : articles.economictimes.indiatimes.com
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