Tax Free Investments in India

It’s again the tax time! It is not the time for running here there but it is the time to get the fruit of the planning you have made throughout the year. If you have not made any investments or activity to save your tax, better you contact a tax consultant to seek help than looking sites and blogs to get advices.

This article intend to introduce a vast set of instruments, whether it is known or unknown to you, where people in India can invest money to save tax throughout the year, to a great extend. Each of this instruments can be classified as less risk to moderate risk in the sense of associated risks, selection of any below mentioned investments should be done upon the risk appetite of the person who opt these options.

Below are the best instruments for tax savings. Remember, each of these have advantages and the same time having disadvantages. Before opting any investment it is always a best practice to identify both advantages and disadvantages of the instrument you prefers.

1. Public Provident Fund (PPF)

A totally tax free saving scheme. It has cumulative interest features and any interest produced by this investment are totally tax free. This is the only investment option in this kind, available in India today. PPF can be a long term savings instrument that is highly beneficial to open for the betterment of your kids or with long term goal. Regular investment in PPF have enormous advantages than depositing money in a or two times. Major drawback of PPF is its long time or 6 years to draw money as loan. However the efficiency to reduce tax overpower all other disadvantages of this instrument. If you are a tax payer, you should certainly have a PPF account!

2. Stocks

Investing in stocks can attract tax and in the same time it is tax free. The difference is, any longtime capital gain from stock investments are totally tax free. In order to receive this facility and investor should hold his stock investment at least for one year. Tax payers who are interested in invest stock for long time can opt this as well as through the newly introduced Rajiv Gandhi Equity Savings Scheme (RGESS).

3. Equity Mutual Funds

Equity mutual funds also working similar to stock investments. Selection of mutual fund required good knowledge to avoid laggard and pick the bests. Any investments more than one year would be free from paying tax on gains. This is a very good option to save money slowly and regularly by investing through Systematic Investment Plan or well known as SIP.

4. Debt funds

Debt fund such as MIPs, pure debt funds are the best suitable option for tax payers to invest their money. Any dividends and inflation indexed capital gains are totally tax free with these mutual fund categories.

5. Tax free bonds

Tax free bonds are another categories to invest to avoid tax on capital gains. Any interest from such bonds are totally tax free. Major disadvantage of this instrument is its long lock-in period. However, it is a best option for those who have very low risk appetite. Ratings from companies such as CRISIL, should be considered when investing in Bonds..

More Tips

1. Invest through a housewife – A tricky investment idea to slap the taxman

If your wife is not working, you have a best option to invest your money through them. I am not sure how many of our people know about this fantastic idea but sure, somebody should be aware of this. In order to do this, you have to first gift money to your wife and it doesn’t have any tax. Then invest it in her name to avoid tax. However, you should take care that the first income would club to your income but reinvestment in her name would not attract any tax. To avoid this, let your wife invest in tax free investment first and let the earning clubbed with your income. As these instruments are already tax free, no much tax burden is going to have. Then reinvest this money to any other investments. It would not attract taxes! as this would considered as the income of your wife and not yours!

2. Make FDs in the name of minor child (15k max per kid)

In order to make a tax free investments for Rs. 30,000 you can opt this option. You have option to put FDs of maximum Rs. 15k in the name of a minor child that is totally tax free. If you have tow minor kids, you can put twp 15k FD’s in the name of each to get tax benefit each year!

3. Invest through an adult child

If your kids are not minor, you still have very legally approved options to invest your money. As per rules, you can gift any amount of money to your adult kid and that is tax free. Investing it for tax free gains is totally legal and every tax paying parent can opt this option to save lots of taxes.

4. Invest through senior citizens

If any or both of your parents have no income, you can invest in their name to earn tax free income. Senior citizens has a basic tax exemption is higher at Rs 2.4 lakh a year. So, any person, who is a senior citizen, can potentially earn Rs 2.5 lakh per year without any tax implications. If he invests in tax saving schemes under Section 80C, the income can be as much as Rs 3.5 lakh a year. In the highest tax bracket, this saves you more than Rs 1 lakh in a year. Very senior citizens have a basic exemption limit of Rs 5 lakh. Utilize these options to save lots of tax.

Does this ideas are sufficient for you to save tax this year or at least can a try for coming financial year? If not, let me know. I will dig for more options that suitable to you. What do you think?