Typically, taxpayers tend to focus on ways of reducing only their own tax burden. This is a normal thing to do, but far greater tax savings are possible when the family as a whole is considered as a tax paying unit.

By combining the leeway offered by non-taxpaying members of a family, and judiciously sharing the family income and wealth among all its members, you will find additional ways of reducing your family's tax burden. Here is how:

You may like to explore the following possibilities of sharing of income and wealth within the members of your family in order to lower the overall tax liability.

1. Create an HUF (Hindu Undivided Family) so that the family property and family income is assessed separately from that of the individual members of the family. Tax practitioners can help you in creating an HUF in a perfectly legal manner.
2. Open as many assessment files as possible for the members of your family, including minor children.
3. Keep separate accounts for all the gifts received on birthdays and social functions so that they can form the sources of future income through suitable investments.
4. To avoid problems of the clubbing provisions, you may consider making a gift to your would-be spouse or your son's would-be-spouse. Such pre-marital gifts do not attract the clubbing provisions.
5. If you are the karta of your HUF, you may make gifts within reasonable limits to the members of your family out of the HUF properties and build their separate assets.
6. Since the income-clubbing provisions apply only so long as your children are minors, you may gift them some assets where the income will be received by them only after they attain 'major' status, e.g. 10-year cash certificates, zero-coupon bonds, etc.
7. Some smart assessees do not gift anything to their spouses. Instead, they organise exchange of assets to avoid clubbing provisions, e.g. a husband exchanges his 1,000 Colgate equity shares with the jewellery owned by his wife (since Stridhan is the absolute property of the lady).
8. Since the accretions to income arising on the transfer of asset does not attract the clubbing provisions you can gift any amount which can be invested by your wife or daughter-in-law in 9 per cent fixed deposit, etc. It is only the interest on such amount gifted that is included in the income of the individual. The interest on interest does not attract the clubbing provision.
9. Since a genuine loan of any amount to your spouse or children does not attract the clubbing provisions, loan any amount (create evidence to avoid hassles in future) to children and spouse, which they may invest in income earning assets.
10. You can use the Public Provident Fund scheme for building up capital of your minor children. If you have two children you can open two PPF accounts and deposit Rs 15,000 in each account every year. You will get tax deduction under 80C. Moreover, interest on PPF is totally exempt from income tax. Thus, when children become majors, you would have created capital for them while enjoying the tax benefits in the interim.

An example of family-wide tax planning

Let us now consider a comprehensive example of tax planning for a family of husband and wife with two children.

You can, of course, modify and improve it to suit to your specific income and tax needs. But it offers several key insights into the principles and strategies of tax planning.

Gupta's gross salary

A N Gupta is an executive working for a well-known company. His gross salary per month is Rs 30,000 made up as under:

Salary	Rs 20,000
House Rent Allowance	Rs 6,000
Conveyance Reimbursement	Rs 6,000
Total	Rs 30,000

Gupta lives in a flat owned by his wife and pays a monthly rental of Rs 8,000. Mrs Gupta pays Rs 12,000 towards municipal taxes.

Under the present rules, the entire house rent allowance received by Gupta is exempt from tax. Similar is the case with conveyance reimbursement, assuming that he spends the entire amount.

Gupta's take-home pay

Thus, his take-home-pay is as under:

	Rs
Salary	20,000
Less: PF Contrinution (10%)	(-) 2,000
	18,000
HRA	(+) 6,000
	24,000

Gupta's income from house property

Gupta purchased a flat in his own name by taking a loan of Rs 10 lakh (Rs 1 million) from his employer @ 6% p.a. repayable over 20 years. The annual installment is Rs 50,000 and the interest paid during 2008-2009 is Rs 60,000. Gupta gets a monthly rent of Rs 10,000 from this flat and pays Rs 20,000 towards municipal taxes.

Thus the income from house property of Gupta will be calculated as under:

	Rs
Annual value (Rs 10,000 x 12)	120,000
Less: Municipal taxes	20,000
Net annual value	100,000
	Rs
Less: 30% standard deduction	(-) 30,000
Interest on loan	(-) 60,000
	10,000

Gupta's family expenses and investments

Gupta's family expenses are about Rs 18,000 p.m. on various household expenses. Gupta's wife has deposits in banks to the tune of Rs 162,500 earning 8% p.a.

There is a Public Provident Fund account opened by Gupta in his minor son's name. Gupta deposits varying amounts in the PPF account every year to minimize the tax liability. This year he invested Rs 21,000 in PPF account and contributed Rs 5,000 in Unit-linked insurance plan of the Unit Trust of India.

All the birthday gifts amounting to Rs 50,000 received by his son were pooled up by Gupta and invested in about 600 shares of Gamma Infotech Ltd @ Rs 83 in May 2000.

The company gave a bonus issue of 1:1 in 2001. Thus, the number of shares increased to 1,200. In May 2007, the son sold these shares @ Rs 251 per share. He is now 19 years old.

	Rs
Sale value (Rs 251 x 1,200)	301,200
Less: Indexed cost of acquisition (Rs. 600 x Rs. 83) 551/406 x 49,800	67,586

The acquisition cost of bonus shares is Nil.         

	Rs
Taxable long capital gains	233,614
The long term capital gains are exempt. However
Transaction tax @0.125 % is payable	292
Post tax proceeds (301,200 � 292)	300,908

Thus, by the time he became of major, Gupta's son had a capital of his own to the tune of Rs 300,908.

The total picture

Let us now look at the total picture:

1. Mr. Gupta's Income (A.Y. 2009-10)
	Rs	Rs
Salary (Rs 20,000 x 12)		240,000
Income from house property		10,000
Total Income		250,000
Less: Deductions
Section 80C
PF (Rs. 2,000 x 12)	24,000
PPF	21,000
ULIP	5,000
Repayment of Loan (principal)	50,000
		100,000
Taxable Income		150,000
Tax		Nil
2. Mrs. Gupta's Income
	Rs	Rs
i) Income from house property
Annual Value	96,000
Less: Municipal Tax	12,000
	84,000
Less: 30% Standard deduction	25,200	58,800
Interest on Bank deposits		13,000
Total Income		71,800
Tax		Nil
3. Master Gupta's Income
Out of his capital, he invests a sum of Rs 300,000 in 8.5% SLR Power Bonds and earns a tax-free interest of Rs 25,500 p.a.

Summary

	Mr Gupta	Mrs Gupta	Master Gupta	Total
	Rs	Rs	Rs	Rs
Gross Income	150,000	71,800	25,500	247,300
Tax	Nil	Nil	Nil	Nil

As Gupta needs about Rs 18,000 p.m. for household expenses, let us look at the family cash flows: 

Cash Flows

Mr Gupta
	Rs	Rs
Inflow
Salary + House property income + HRA)		408,000
Outflow
PF	24,000
Housing Loan	110,000
Municipal taxes	20,000
ULIP	5,000
PPF	180,000
Net inflow	228,000
Mrs Gupta	1,000
Master Gupta	25,500
Total inflow for the fmaily		254,500

Thus, the cash flow position will be quite comfortable leaving a surplus of nearly Rs 38,500.

This example of the Gupta family shows how any family can prosper by careful planning of investments and tax.

Let us repeat once again: don't give importance to the specific numbers in this example. Try to understand the broad principles, modify and use them in your specific context.

[Excerpt from the book, Personal Investment & Tax Planning Yearbook by N. J. Yasaswy, published by Vision Books.]

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