Marriage has Fringe Benefits too !!!

I find that generally investors fail to plan and structure their investments and taxes optimally, not because of negligence or a lack of inclination. It is more to do with the fact that one’s work keeps oneself so busy and preoccupied that financial planning becomes an exercise that is forever postponed to next week. Then before you blink March arrives….. cursing under your breath, you make an appointment with the CA. He is doing the same as he knows you are not going to provide him with all required paperwork. Some last minute, convenient tax saving investments are done and a solemn resolution is made that next year is going to be different.

Well, next year is indeed here and its time to act upon your resolution. The trick is to start early and take the necessary action step by step. Financial planning is at all times a process and not a one time, sporadic exercise. The following are some pointers to help you along the way.

Well begun is half doneThat you are reading this with interest (and intention hopefully) is in itself the big thing. Since you are starting early, you have time on your side. And believe me, time is a great ally. Slowly and surely, act upon these pointers (whichever is applicable to you) and you won’t need your CA’s appointment in March ’08.

The following, in my experience, is a list, of aspects largely neglected by most investors.

Use the Fringe Benefits of Marriage! In sickness and in health…..and in paying taxes too!The wedding vows are done, the honeymoon is over and reality has begun! I should know, I have been married ten years now. However, I did discover a silver lining! Marriage helps in reducing taxes substantially!But first some ground work has to be done. Have separate joint accounts, one for husband and wife and the other for wife and husband, even if one of them is not assessed for income tax. This may sound trivial but actually is of great importance for proper tax planning. This is especially important if you have or planning to buy a house on mortgage and benefit from the tax breaks.


Loan to Spouse

Did you know?
If your wife is a home maker, you can give her a loan to make investments. She earns interest on the investments and pays you interest on the loan. While you won't have to pay tax on the income, the money remains in the family!

You are in the highest tax bracket and she doesn’t have taxable income. (For all you ladies there, I am not chauvinistic, its just for writing convenience. The situation could be reverse too and the same principle would apply)

Anyway, it is vital to start a tax file in her name. The idea is that she starts earning income up to Rs. 1.45 lakh (Rs. 1.10 lakh for males). This income being below the tax threshold, will not be taxable. You ask how is a miracle possible that your wife starts earning so much overnight? She doesn’t. You transfer money to her which you would have otherwise invested in your name. If you earn it, you pay tax @33%. If she earns it, its gonna be tax-free!

But there is a glitch. You cannot transfer money by means of giving her a gift. The problem is that income on such gifted amount will be anyway clubbed in your hands for tax purposes. How do you work around this situation? Well, give her a loan! Though an interest free loan is technically possible, it is better to have an arm’s length contract by charging a nominal rate of interest (say savings bank rate). At a rate of 8% p.a., this way you can make income on over Rs. 15 lakhs of capital tax-free! Of course, the brownie points that you will score with her is an additional advantage!

Housing Finance
If you take a joint home loan, each of you gets the benefit of interest deduction of Rs 1.5 lakh

Marriage has benefits even when buying a house. Are you planning to buy a house anytime? Then, even if you are Mr. Deep Pocket, it is better to opt for housing finance. Tax breaks are available only on borrowed funds and not on the use of your own moolah. Moreover, in most cases, you will find that the direct cost of borrowing is much lesser than the tax saved especially now with the income tax laws offering tax breaks of Rs. 2.5 lakh on combined interest and principal payments.

Like I said, if you are buying a house, it helps if you are married. Real estate can be co-owned. Buy the property with both having an equal share. This way she cannot throw you out of the house (half of it is yours remember). But that’s not my point.

The loan should also be taken equally and the interest and principal payments for the same should be made separately by each from their respective bank account. If the above is carried out, each is entitled to an interest deduction of up to Rs. 1.5 lakh under Sec. 24 and a principal deduction of Rs. 1 lakh under Sec. 80C. So totally between the both of you, up to Rs. 5 lakh of income will escape tax!

Makes you wonder why can we marry only one?

Gift to Minor Children
The wife is taken care of, can kids be far behind? If you have any minor children --- congrats! You have just made some additional capital tax-free. See, you can earn an income of Rs. 1,500 for each child totally tax-free. So say, you have two children…that makes it Rs. 3,000. Capitalise this by say 7% and you have just made income on over Rs. 40,000 totally tax-free.

Mediclaim
Mediclaim is a must for all, taxpayers or otherwise, rich or poor, young or old, in view of the high cost of hospitalisation. If you haven’t bought a Mediclaim policy so far, do so NOW! There is a tax break of Rs. 10,000 available, but that is not the point. Mediclaim is for the good of you and your family members --- the tax cut is just an added benefit.

Public Provident Fund
In the absence of government social security, a regular PPF investment works like a safety net for the later years. This is especially true in the case of the self-employed who do not have a company provident fund to fall back upon. With the interest rates as they are currently, the 8% tax-free interest of PPF is super! I know, equity funds beckon left, right and center --- but hey, we are talking just Rs. 70,000 a year here. Just do it!

Create wealth --- not capital.
I may be addressing a minority here, but they are out there. I am referring to people who shy away from equity on account of the perceived risk. Do not reject equity-based schemes of MFs totally.

It is next to impossible to build wealth without equity exposure. Note that I use the word “wealth” and not capital. Wealth is when your capital brings a smile to your face. And believe me, saving a part of your salary in FDs is not going to do that.

However, with equity one can get very good rewards but the possibility of losing one’s shirt cannot be lost sight of. So do invest but with your shirt on!

If you are a trader, remember, Sec. 88E allows you a set-off of the Securities Transaction Tax against your trading profits. Arrive at your taxes only after claiming this set-off.

Tedious TDS
Last but not the least the most important thing to do is to collate your TDS receipts. Such TDS operates like advance tax already paid i.e. from your final tax liability, you have to pay only such amount that is over and above the tax already deducted. Do this as the year goes along. Most leave this exercise towards the end of the year leading to huge inconvenience and short counting.

To conclude.
You will appreciate that the above-mentioned points are really commonsensical and do not need much of one’s time and effort to put into practice. However, these baby steps have a way of adding up and sometimes make all the difference between financial health or the lack of it.