With working couples fast becoming the norm, here are some ready-to-use tax-saving tips from an expert.

Taking advantage of differing tax slabs

For FY 2007-08, the initial personal tax exemption limit enjoyed by a male taxpayer is Rs 1.10 lakh (Rs 110,000), while it is Rs 1.45 lakh (145,000) in the case of women taxpayers.

Thereafter, the personal income tax rates are the same for both men and women, namely, the tax rate is 10% on total income in excess of the exemption limit up to Rs 1.50 lakh (Rs 150,000), and at 20% on income between Rs 1.50 lakh and Rs 2.50 lakh (Rs 250,000).

The income tax rate is 30%, up to an income of Rs 10 lakh (Rs 1 million), while there is an additional surcharge of 10% on the whole of income tax in case the taxable income is more than Rs 10 lakh. (Of course, both the income tax and income tax surcharge combined, have together to be increased by a further 2% + 1% education cesses).

The fact that applicable tax rates are different for different income slabs can offer tax saving opportunities for working couples.

For example:

If, the full deduction of Rs 1 lakh (Rs 100,000) available under Section 80C in respect of life insurance premium, contribution to public provident fund, et cetera cannot be availed of by each of the spouses, in most cases it would be better to claim the deduction in the hands of the spouse whose income falls in the higher tax slab rather than in the case of the spouse whose income falls in a lower slab.

Some cases may work quite the opposite: let us suppose one spouse, say, the wife, is paying the insurance premium (LIP), of, say, Rs 25,000, and her total income is, say, Rs 170,000.

In such a case, even though her husband may be in a higher tax bracket, it may be more tax-efficient if she were to pay the life insurance premium herself so as to get deduction of the LIP under Section 80C and bring down her total income to Rs 145,000 in which case she would not be liable to pay any tax at all!

If, however, her husband is unable to avail of the full deduction of Rs 1 lakh available under Section 80C, and his income is liable to the maximum rate of tax, then, it would obviously be better and more worthwhile to claim the deduction in the husband's name rather than that of the wife.

This is because deduction of LIP under the higher income tax slab would lead to a higher overall tax deduction for both.

House ownership and HRA

Sometimes working couples have a possibility of saving income tax on house rent allowance within the family, particularly where one of them owns a house.

For example, let's say Mrs A owns the house in which she, along with other members of her family stay in. If her husband gets a house rent allowance which can be claimed exempt from income tax, then he can pay rent to his wife and claim exemption in respect of the house rent so paid by him from the house rent allowance to the extent deductible under the provisions of Rule 2A.

If Mrs A is also employed and gets a rent, say of Rs 10,000 per month from her husband, and the husband is able to take full benefit of the amount by way of exemption of house rent allowance, then this will result in a lower rate of tax because of deductibility of 30% deduction from the rent under Section 24.

Thus, even if Mrs A were to pay tax on Rs 120,000 rent she would not pay tax on the whole of it but only on Rs 120,000, less 30% thereof, i.e., on Rs 84,000 only. The effective highest rate thus would be 21% only and a saving of 9% of income tax on Rs 120,000, i.e. Rs 10,800 would be possible in such a case.

The above is an example of the various permutations of income tax savings possible in different cases of HRA and house ownership.

More tax-saving tips

Both husband and wife should, by obtaining gifts from older family members, have a separate Hindu Undivided Family (HUF) so as to claim a further exemption of Rs 1.10 lakh through proper tax planning.

If the couple has children, say, one son and one daughter, each one can separately form a trust for the would-be spouse of one child in such a manner that the initial exemption of Rs 1.10 lakh under the provisions of Section 164 of the Income Tax Act is available.

If the couple does not have a child, then the husband can have a trust for an unborn son, and the wife a trust for the unborn child daughter to get a separate exemption of Rs 1.10 lakh each.

Besides, if either worships some deity, then he or she can have a private religious trust of one's own chosen deity. Such a trust would be liable to assessment as a separate taxpayer under the category of artificial juridical person and would enjoy a separate exemption of Rs 1.10 lakh.

Happy tax-saving!

Excerpt from the book:

51 Tips for Saving Income Tax

By R N Lakhotia

Publisher: Vision Books

Price: Rs 145

R N Lakhotia is one of India's top authorities on taxation and practising as an advocate and tax consultant. He has written over 100 books on tax planning and is a regular columnist for several newspapers.

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