Tax Planning – Tips and Tricks- Part II

Tax Planning – Tips and Tricks- Part II

FPJ BureauUpdated: Friday, May 31, 2019, 08:30 PM IST
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In last week’s article, we had discussed an innovative tax saving mechanism where one could give a loan to one’s wife (technically the correct term is ‘spouse’ but for reading convenience we use the word ‘wife’). From the point of view of tax legislation, any husband and wife are two distinct tax entities and are assessed separately and independently. A prudent taxsaver can take advantage of this fact in many situations to bring down the total tax liability of the family. Of course, the strategy works only if the husband is in a higher tax bracket than the wife (wife could even be in the zero bracket if she is a homemaker) – idea is that the husband transfers funds to the wife that he would have otherwise invested in his name.

After reading the article, readers have posted several questions – and as most of these questions are similar in nature, we are answering the same through this week’s article. One question was whether there is any minimum limit on the loan term – no there is no minimum limit – but one can act as per convention and structure the loan for anywhere between one year to five years. As far as documentation is concerned, though technically simply putting the terms paper and both parties signing the same should do, using stamp paper and notarizing the same will not hurt. Once again, there is no hard and fast rule regarding this, but doing it in a formal manner is just better. Some have inquired whether the reason for the loan needs to be mentioned – well, it does not have to be – however, it would help if it is mentioned that the person taking the loan may use the funds as he or she may desire to including investing the same. And lastly, some readers have inquired as to how to claim the above in income tax. Well, you do not have to claim any tax benefit as such, it is already worked in.

Once again, realize that the tax benefit is not available on the loan given – however, since the interest earned by the loan taker is taxable at a lower rate, as a family unit, this strategy works better than investing funds in one’s own name. That’s all.

There are several instances when husband and wife can team up together to save tax. The following are a few instances —

Case-1

Mr. Joshi has sold a residential house and earned a capital gain of Rs. 20 lakh. The tax liability thereon is Rs. 4 lakh.

He finds that he has some shares purchased long ago, which, if and when sold will entail a heavy long-term loss. If he sells these shares through a recognised stock exchange in India the long-term loss, being exempt, is not available for any setoff against any gains. However, if he sells these shares directly to his wife without going through a stock broker, he will be earning non-exempt long-term loss which can be setoff against the gains.

What if she does not have enough funds to purchase these shares? Well, once again he can give her a hand loan to enable her do so. As soon as the shares get transferred in her name, she can sell these through a broker and settle the loan.

What if he does not have a wife? Well, he can use the same trick with his girl friend. What if he does not have a girl friend? The solution is simple — Find one!

But jokes apart, such tax structures can be tailor made depending upon the individual’s situation. Let’s see another case in point.

Case-2

Both Mr. and Mrs. Joshi have accepted a very lucrative buy-back offer from a public limited company. When they accept the offer, they will be directly transferring their shares to the company and not through a recognised stock exchange in India. Both of them will be earning heavy long-term capital gains.

However, what if just before accepting the offer, both of them sell the shares to each other through a recognised stock exchange in India thereby earning tax-free long-term capital gains. After the buy-back process is over, both of them may (or may not) earn short-term capital gains but the tax thereon will be much less than what they would have had to pay otherwise.

Case-3

Mrs. Joshi is a house wife and has hardly any income of her own.

Mr. Joshi has sold a residential house for Rs. 45 lakh and earned capital gains of Rs. 30 lakh. He has no investment in shares and there is no possibility of earning capital loss.

He can buy Capital Bonds of NHAI or REC in the name of his wife and save the tax on the capital gains. Yes, you read that right. He can buy the Bonds in the name of his wife (or a friend) and still claim the Sec. 54EC exemption?

As per the language of Sec. 54EC, there is no requirement that investment should be in name of assessee. The only condition is that the sale proceeds of capital assets must be invested in certain specified bonds — ITO v Smt. Saraswati Ramanathan – [2009] 116ITD234 (Delhi).

Can the same tenet can be extended to exemptions u/s 54 and 54F. The answer is in the negative since though the logic can be extrapolated, there is no direct case law on this aspect.

Next week, we shall examine a few more tax saving tricks and tips that can be structure between two spouses to derive optimal tax advantage.

(The authors may be contacted at wonderlandconsultants@yahoo.com)

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