One would be forgiven for being sceptical because for the ongoing year (FY 2007-08), the total income exempt from income tax in the hands of a male individual is only Rs 110,000 and that for a woman only Rs 145,000. So how, then, can an income of Rs 11.20 lakh be completely exempt from tax?
You can achieve this by following one of the five golden rules of tax planning, namely:
Spread your income among your family members
This golden rule makes constructive use of the classic British concept of divide and rule. The simple rule is that each family member must have his or her independent source of income so as to legally become an independent taxpayer under the provisions of the Income Tax Law. When the entire income of a family belongs to just one member, the tax liability is very much higher than when the same income is divided among different members of the family.
Thus, the first golden rule of tax planning requires that one develops income tax files for oneself, one's spouse, one's major children, the Hindu Undivided family, and for all other major relatives in the family, including one's parents.
Of course, under the income tax law it is not possible to arbitrarily divide or apportion one's income amongst different members of one's family -- and then pay lower tax in the names of different family members. However, you can achieve this goal by intelligent use of the perfectly legitimate facility of gifts and settlements.
Here is how:
Generally, any gift you receive from various members of your family and specified relatives is not considered your income but a capital receipt. Thus, no income tax is payable on gifts received from relatives, and gifts received from parties other than relatives up to a sum of Rs 50,000 -- and up to any amount at the time of marriage.
Let us consider the example of a small family consists of Mr. A his wife who is a homemaker and not a career person, his major son studying in college, and one major daughter studying in school. They also constitute a Hindu Undivided Family.
The total combined income of all five members of the A-Family, including the HUF, is Rs 11.20 lakh. Every member contributes Rs. 70,000 in the PPF account and has invested Rs. 30,000 in an infrastructure Mutual Funds or company.
Through an intelligent use of gifts and settlements by Mr A to all members of his family, each family member has investments in business, industry, house property, etc., in their own individual names in such a manner that each of the male members and the HUF would have a gross annual income of Rs 210,000 and both the female members have an income of Rs 245,000 each, in all adding up to Rs. 11.20 lakh (Rs 210,000 x 3 + Rs 245,000 x 2)*.
And here is the beauty: this income of Rs 11.20 lakh can be totally tax-free. Here is how:
Section 80C of the Income-tax Act, 1961 provides each individual taxpayer, including an HUF, a deduction of Rs. 100,000 from his/her gross income when investments up to Rs 1 lakh is made in stipulated investment avenues, such as PPF, infrastructure bonds, equity linked savings schemes, life insurance, etc. Thus, all the four family members, and also the HUF, can avail of this deduction under Section 80C to the extent of Rs 100,000 each.
After availing of the deduction of Rs 100,000 each under Section 80C, the taxable incomes of the five taxpayers of the A-Family would be as follows:
|
Mr A |
Rs 110,000 |
|
Mr A's son |
Rs 110,000 |
|
HUF |
Rs 110,000 |
|
Mrs A |
Rs 145,000 |
|
Mr A's daughter |
Rs 145,000 |
There, we have it!
The total tax liability of the A-Family is now ZERO, since the income of each taxpaying constituent individual/HUF is below the taxable limit which, as noted earlier is currently Rs 1,10,000 for male and HUF taxpayers, and Rs. 1,45,000 for women tax payers.
It may also be mentioned here that we have not considered the additional tax savings which are possible through a deity Trust, or a trust for an unborn person in the family, which would further increase the zero income tax level income to more than Rs 14 lakh (Rs 1.4 million). In addition, several items of fully exempted income, such as agricultural income, dividend income, income from mutual fund, etc., could be planned for each of the four family members, and also for the HUF, to secure a still higher level of zero income tax for the A-Family.
* Rs 210,000 x 3 (male members) = Rs 630,000
+
Rs 245,000 x 2 (female members) = Rs 490,000
Excerpt from the book:
Tax-Free Incomes & Investments: A-to-Z Tax Guide (A.Y. 2008-09)
By R N Lakhotia
Publisher: Vision Books
Price: Rs 190
R N Lakhotia is one of India's top authorities on taxation and practising as an advocate and tax consultant. He has written over 100 books on tax planning and is a regular columnist for several newspapers.
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