Just as rules are important for good living so also there are some golden rules of tax planning.
The five simple yet effective golden rules of tax planning are:
Ø Spread the taxable income among various members in your family;
Ø Take full advantage of tax exemptions available under the law;
Ø Take full advantage of permissible tax deductions and rebates available on stipulated tax saving investments;
Ø Make optimum use of tax exempted incomes; and
Ø Simple tax planning is smart tax planning.
Rule 1 - Spread your income among your family members:
The first step in tax saving is to adopt the 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 tax payer under the provisions of the Income Tax law. In case the entire income of a family belongs to just one member, the tax liability is much higher than when the same income is spread among different members of the family.
Now, under the income tax law, it is not possible to arbitrarily divide one's income amongst different members of the family - and then pay lower tax in the names of different family members. However, this goal can be achieved by intelligent use of the facility of gifts and settlements.
Gifts you receive are not your income:
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 also gifts received from parties other than relatives upto a sum of Rs 50,000 and at the time of marriage upto any amount.
The first 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 relative sin the family, including one's parents. The development of different files of major family members can be achieved through the process of gifts and settlement.
No Income Tax On Inheritance
No income tax is payable on any amount received or inherited by you, whether in the form of movable assets or immovable assets, consequent to the demise of your friend or relative. Moreover, there is no upper limit to this exemption. Hence, whenever you receive either bank fixed deposit, shares or immovable property consequent to the demise of a person, you don't have to pay any income tax at all on the value of all inherited assets. The simple rule is that the asset so inherited by you is not your income; it is a capital receipt. Hence you are not liable to pay any income tax on the money and assets you inherit.
Rule 2: Take full advantage of all tax exemptions:
The second step of tax planning lies in claiming all the exemptions and deductions which are permissible under the Income Tax law. A list of most such exemptions and deductions is contained in Section 10 of the Income Tax Act. This list has to be optimised depending on your facts and circumstances. If you and your family members are not claiming the optimum benefit of exemptions and deductions, then it is time to focus on investment planning in the group so that every family member gets full benefit of tax exemptions and tax deductions which are covered in detail in the book.
Rule 3: Take full advantage of tax deductions:
Various tax deductions are available under the Income Tax law. One should try to avail of the benefit of these deductions for each and every member of the family. The various in vestment options that offer tax rebates should be reviewed keeping in mind various aspects like the age factor, etc. A check-list should be prepared of the various deductions permissible under the Income Tax law. Check whether each and every tax paying family member is claiming these. If special care is taken of this aspect, then it is legally possible to save a lot of income tax.
It is suggested that a chart be prepared of tax, deductions and exemptions for every family member of purposes of overall tax planning of the family. It would be worthwhile if a group tax chart is prepared containing details relating to income tax, tax deductions, net taxable income, tax deducted at source, rebate of tax, and, finally, the net amount of income tax paid in the case of each family member. With the help of this one simple chart, you can achieve substantial tax planning, as it will show up those who have not made optimum use of tax deductions.
A Trust For Minor Children Eliminates Clubbing Of Income
The gifts made to a minor child would similarly result in clubbing of income. Hence, from the point of view of tax planning a trust could be created for the welfare of the minor child with a specific condition that no part of income should be spent on the minor child during the period of minority. If this simple technique is adopted then there will be no clubbing of income of the minor child with the income of the parents. The clubbing provisions do not apply when you make gifts to your major children.
Rule 4 - Exempted incomes:
There are innumerable incomes under the Income tax law which is exempted from the purview of tax. These incomes are known as exempted incomes.
For example, interest income from tax free bonds and any income from agriculture are some items of exempted incomes. There are other exempted incomes also which are discussed in the book. Proper planning of your investments in a way so as to generate tax exempt incomes is another golden rule of tax planning.
Rule 5 - Don't overdo it - Keep tax planning simple : Easy, simple, hassle-free should be the objectives of your tax planning approach. The message which we want to bring to you is that you should adopt tax planning but never overdo it; just remember the key points highlighted in this book which will help you fulfill your tax planning mission without going overboard.
Saving tax legally is a reality but only for those who plan their taxes based on such principles. This would also result in avoiding all the worries and tensions as all their incomes, assets and investments are duly accounted for from the point of view of taxation.