Another common way to avoid tax is by investing in the name of a non-working spouse or minor children. Money gifted to a spouse or a minor child does not attract tax. But if that money is invested, the income it generates is clubbed with the income of the giver and taxed accordingly. If a husband has invested in fixed deposits in the name of his wife or minor child, the interest will be taxed as his income. In case of children, there is a small exemption of `1,500 per year per child for a maximum of two children.

However, the clubbing happens only at the first level of income. If the amount earned as interest is reinvested and earns an income, it will be treated as the income of the recipient, not of the giver. The income from the reinvested income does not attract the clubbing provision.

Here's how you can make this rule work for you. Gift money to your nonworking spouse and then invest it in any tax-free investment option. The earning will be clubbed with your income, but since it is taxfree, it won't push up your tax liability. Your spouse can then reinvest that money. The income from the reinvested income will not be clubbed.