Circumstantial planning

A wedding, a career shift or an investment plan for your kids - each occasion throws up opportunities to derive tax benefits.

Print Edition: January 22, 2009

As you grow older, your financial needs change and so should your investment strategy. MONEY TODAY looks at the typical high points of your life and the ways you can minimise your tax outgo in these circumstances.


There's one guest you definitely don't want to see at a wedding party, and no, we aren't talking of an old flame. Imagine, if you will, a tax collector standing behind the happy couple, taking his share of the cash gifts. Inconceivable, isn't it? A wedding is one of the few occasions when the authorities do not tax gifts of cash. Of course, the recipient will have to prove that the cash was a gift, so it might make it easier if money is given in the form of cheques or demand drafts.

Even after the actual ceremony, some of these benefits continue. Cash gifts from specified relatives are not taxed. What the couple should be aware of, however, is the clubbing provision. The money that a woman receives from her husband and parents-in-law is not taxed, but any income earned from investing this money is clubbed with the income of the giver. Similarly, the income from the money received from the wife would be clubbed with her income.

 AgeMonthly Contribution (Rs)Corpus At Age 60 (Rs)
Ajay252,00046.18 lakh
Bhushan354,00038.29 lakh
Chander458,00027.86 lakh
Bhushan and Chander withdrew their PF when they changed jobs at 35 and 45 years, respectively. Even though Bhushan's monthly contribution at 35 is double and Chander's at 45 is four times that of Ajay, their retirement corpus will not be as big.

It may seem easy to escape the clubbing provisions between husband and wife. A man can give a gift to his brother who can then pass it back to his sister-in-law. However, if such circular transactions are discovered, the exemption can be disallowed. As Delhi-based financial consultant Surya Bhatia says, "The law should be followed not just in letter, but in spirit."

If the income from the gifted money attracts clubbing, perhaps a husband could give a loan to his wife. Such loans are possible if the money is not used to generate income. "It all depends on the genuineness of the transaction. It is possible to take such loans for buying property," says Vikas Vasal, executive director, KPMG. If the money is invested, then the recipient will have to prove that it is a loan and the giver will have to charge a reasonable rate of interest on that loan. The giver will have to add the interest to his income for the year. Given the tax payable on that income and the problems of proving that the money was indeed a loan, it's a zero sum game.

Minor Problems

Cash Gifts From These Relatives Are Not Taxed As Income
• Spouse
• Parents
• Parents-in-law
• Own siblings (and their spouses)
• Siblings of spouse (and their spouses)
• Siblings of parent (and their spouses)
• All lineal ascendants or descendants (and their spouses)

Till a few years ago, you could invest in a long-term bond designed to mature when your child turned 18. In this way, you paid no tax, and by the time the investment matured, your child would be liable to pay tax on it. But this has changed. Today, the interest earned on term deposits and bonds is taxed in the year that it accrues even though the investor gets it on maturity.

This complicates the matter for the parents who want to invest in fixed deposits for thier children. The income earned from the investments of children below 18 years is clubbed with the income of the parent who earns more. So, opening fixed deposits in the name of minors makes little sense. What is practical, however, is to open a PPF account in the name of the child, as PPF income is not taxable at any stage (see page 36). The contribution to your own PPF account and that of the child cannot exceed the overall limit of Rs 70,000 a year. This is something Amritsar-based college professor Sandeep Kumar knows. He wants to open a PPF account in the name of his twoyear-old son because his own account is maturing in three years.

If you are willing to take a little risk, go for other tax-free options such as Ulips. The income from Ulips is not taxable. The income from traditional life insurance policies such as money-back plans and endowment policies is also tax-free, but the returns are niggardly compared with the other options. The long-term nature of Ulips makes them good investments for your children. It's best to choose a plan that can be continued by the child well into his adulthood.

Switching Careers

A rival company makes you an offer that you cannot refuse. You move with a higher salary, better designation, a corner office and all the perks. And you close the Provident Fund account you had with your earlier employer and start a new one. You repeat the process when you get an even better offer a few years down the line. Each time you wipe out your PF account, treat the money as some sort of windfall and don't think of investing it.

That can be a costly mistake. As the table shows, a slow and steady contribution to the PF account is very rewarding in the long term. If you keep adding small amounts and don't withdraw anything, then your PF can be the one and only debt investment in your financial plan. And that too, completely tax-free.

Grown-up Kids

Your grown-up child can help you save tax. The interest paid on the education loan for a child is fully deductible under Section 80E of the Income Tax Act. "Instead of saving for his education, take a loan and avail of the tax benefits," says Sudhir Kaushik, director of tax e-filing portal, Taxspanner. Besides, investments in the name of children over 18 years do not attract the clubbing provision.

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