Though there is no tax on gifts, all gifts in excess of Rs 50,000 (other than those from relatives) and income generated through them get clubbed with the recipient's taxable income. However, income earned by assets gifted to minor children, spouse and son's spouse are included in the income of the donor for taxation.

If you want the money earned to be treated as independent income of your minor children, spouse or son's spouse, you will have to prove that the recipients had used their own acumen for making money from the gifted assets.

It might not be easy to satisfy the taxman that the income through the asset you gifted is not a passive investment income and has been earned independently by your spouse or minor children. So the easiest way of saving tax is by gifting money or assets to your major children and parents who don't have any income of their own.

Let's assume that your parents are senior citizens (above 60) and have no income. You can gift them any amount of cash for investing in high-return instruments such as senior citizen's savings scheme.

As senior citizens do not have to pay any tax for annual income up to Rs 2.5 lakh, the interest income does not become taxable unless it exceeds this exemption limit. This means you can invest up to Rs 25 lakh through each of your senior parents without any source of income if the annual interest or return is 10%. You can invest up to Rs 50 lakh through your senior parents and have a tax-free annual income of Rs 5 lakh.

If your parents are above 80, they are entitled to tax-free income up to Rs 5 lakh per year for "very senior citizen" category introduced in the 2011-12 Union Budget. You can invest up to Rs 50 lakh through each of your "very senior citizen" parents in instruments that give 10% annual return and avoid the taxman for interest income up to Rs 10 lakh earned by both of your parents together.

You can save a total of Rs 3 lakh (30% of Rs 10 lakh earned as interest income) in tax each if you are in the highest tax bracket. So you can invest a total of Rs 1 crore through your parents and save up to Rs 6 lakh in taxes on the interest income of Rs 10 lakh.

If you gift the money to your major daughter for investment, the interest earned from the amount will be taxable only after it crosses the exemption limit of Rs 1.9 lakh annual income.

The income from money invested through your son above 18 will become taxable when it exceeds Rs 1.8 lakh annually. Even when the interest income brings the recipient into the tax net, you still have the advantage of paying less tax then what you would have paid on investing directly.

If you have both parents above 80 and two major daughters, you can invest up to Rs 1.88 crore and have a tax-free income of up to Rs 18.8 lakh.

Even if you don't have major children, you can still save taxes by creating a trust for benefiting your minor children.

"You need to make an irrevocable transfer to the trust, where money cannot be claimed back by the donor. All investments are made through the trust and the income generated can only be used in accordance with the purpose of the trust. The income from the investments is not clubbed with the donor's income, but the trust needs to pay the tax. This method (diversion of income by overriding title) helps reduce the tax liability," says Shuddhasattwa Ghosh, associate director, tax and regulatory services, PricewaterhouseCoopers India.

Now, when you start planning your taxes for the current financial year, make use of this provision to save big on taxes. Make use of the gifting provisions to optimise taxes while making your family financially secure. As you will be giving money on the basis of mutual trust, be sure that the recipient won't take undue advantage of your trust

Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )

1. ICICI Prudential Tax PlanInvest Online
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5. Birla Sun Life Tax Relief '96 Invest Online
6. IDFC Tax Advantage (ELSS) Fund Invest Online
7. SBI Magnum Tax Gain Scheme 1993 Invest Online
8. Sundaram Tax Saver Invest Online
9. Edelweiss ELSS Invest Online
   
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