Mukesh is averse to equity exposure and do not want to go for risk-oriented financial instrument like equity mutual funds, stocks and derivatives etc. But, Mukesh has also scared about various the debt instrument alternatives like bank fixed deposits (FDs), NSCs (National Saving Certificates) and MIS (Monthly Income Saving) etc., but all its interest is taxable as he is already in the highest tax bracket.  So, he has been putting all the money in public provident fund (PPF) as maximum allowed limit for over 10 years which is completely its income tax free. Today, the limit has been increased to Rs1 lakh making it his best option as PPF tax-free investment under section 80C. It is a retirement kitty that Mukesh is creating. Not only does PPF qualify for tax exemption under section 80C, the current interest rate of 8.70% pa (per annum) tax-free work out really well. Read about: One Stop Shop for all things PPF!

Most of the people like Mukesh do not see beyond PPF saving, everybody knows that you can save taxes by investing in Public Provident Fund (PPF). But there are many provisions under the Income-Tax Act which can create lots of tax-saving options if you know about them and plan for them. In this post, we would look other mix of different tax-free financial avenues which you would have more room to save tax with a judicious use of tax-saving tips that you and your family can use in the current fiscal and, hopefully, beyond as well.
• Load up your saving account
Though interest from bank saving account is taxable, as of FY 2012-13, interest up to Rs10,000 in one financial year is exempt from tax  under section 80TTA and not deductible tax at source(TDS).  It means that if you can load up an average balance of Rs2.5 lakh in your savings account during the financial year (on which most banks giving interest @4% pa), the interest would be tax free. This average could be lower, if you had savings account with banks offering higher interest rates as they offer 6% for balance up to Rs1lakh and 7% for balance above Rs1 lakh.
• Go for tax-free bonds
Although, these bonds are not eligible under section 80C investment but its generated interest is tax-free for investors. Tax-free bonds are certainly a good option for those in the highest tax bracket. Since the maximum limit for retail investor has been raised from Rs5 lakh to Rs10 lakh. You will benefit from safely locking a chunk of your savings in tax free bonds by diversifying across AA+ or AAA- rated bonds of government companies. For those in the 30% tax bracket, interest from tax free bonds (around 7.8%) will beat post-tax FD returns (around 6.3% now) and is an option worth considering. For those in the 20% tax bracket, it may not work as well as the difference in post-tax FD interest (around 7.2%) versus tax free bond coupon is not significant. Read: Higher Tax Bracket: Think Tax-free Bonds
• Contribution towards EPF and VPF
EPF (employees’ provident fund) and VPF (voluntary provident fund) are two good bets which are giving 8.5% tax-free income and eligible for 80C tax savings also. While EPF contribution is limited to 12% from you and another 12% from the employer but you can put in 100% of your basic pay and dearness allowance in VPF. If you utilize VPF properly, you can create a good retirement corpus under the tax free regime. But, if you leave your current company and it is not 5 years since the contribution started both EPF and VPF will be taxed at your current tax slab. Read: Early withdrawal could lose your Tax Benefits under Section 80C
• Open PPF Account for Child’s Planning

PPF is great tool to build corpus for your children. That way, minor child’s PPF can have Rs1 lakh invested each year which will create a good education corpus. Apart from being tax-exempt, your Rs1 lakh investment will go towards 80C limit. Your contribution to the child’s PPF account will be deemed as a gift and clubbing provision under section 64 should apply. But since the interest on PPF is tax exempt, it does not matter. However, if by the time of the PPF matures, the child has become a major, and the corpus will be the child’s asset; so its income will be not clubbed with yours.
• Open Fixed Deposit Account for Child
Bank fixed deposit’s interests are taxable in the name of minors either ways, due to the clubbing provisions for your gift. Even though there is no gift tax in India, clubbing provisions under section 64 will be enforced. However, you have limited recourse to relieve this situation. There is an exemption of Rs1,500 a year for each child’s income, but it is limited to two children. Any income in excess will have to be shown in your taxable income until the child turns 18. Assuming 10% returns, you can invest Rs15,000 each in the name of two children to get tax-free interest. Moreover, one can transfer funds to a major child; there will be no clubbing provision, provided you document the gift.If your child is getting paid for modeling for an ad or a reality show, the income will also not be clubbed with the parents’ income.
• Pay Professional Fees to Spouse
If you want to make fixed deposit in the name of your spouse without affecting clubbing provisions, you pay money to your spouse as professional fees for some services. The word of caution here: There has to be realistic transaction to justify; else it may be questioned by the tax authorities.  It could be, say fees for designing you home, if your spouse is an architect. If your spouse does not work, the interest generated on the money given to her will be clubbed with your income. So, if you can show payment to the spouse for legitimate reasons, then it will be her income. You can reduce your family’s tax burden, if your spouse’s income is below the tax threshold or is in a lower tax bracket compared to your income. Read Fine Print: How can You avoid Cascading effect on Gifts Received from your Relatives?
• Avoid  Fixed Deposit in the name of Parents
Although, investing in the name of your parents, clubbing provisions are not applicable. A small amount may fly under the radar, but investment of large amounts can lead to questions about the source of income of retired parents. Avoid opening an FD in the name of your parents just to get 0.5% to 0.75% p.a. higher interest in case of they fall under senior citizen category.
Conclusion
The recipe to tax savings in debt avenues with investment in the name of your family members is that money should be transferred to a family member in the lower tax bracket carefully without resorting to unlawful methods to prevent being viewed as tax avoidance. Don’t be penny-wise and pound-foolish. Pay the legitimate taxes you own to the government. Read also: Are your Fixed Deposit Returns axed by TDS?
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Suresh Kumar Narula

SEBI Investment Advisor, Founder & Principal Financial Planner at Prudent Financial Planners
Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in
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