Tax Saving - Different Ways People Convert Black to White Money

Voluntary Disclosure of Income Scheme

There was a VDIS (Voluntary Disclosure of Income Scheme) from the Indian government in 1999 where the government asked the people to disclose there black money by paying 30% taxes and no action would be taken under income tax act against them. It was a massive success. The government was able to collect some Rs. 25000 crores as income tax through this scheme, so the number one way is to pay tax on your black money to make it white, and the government should start this scheme again instead of imposing more and more taxes on general public. If it is done again, everyone will be benefited, Black money holders, general public, and the government also.

Now below are some famous illegitimate ways people convert their black money to white money in India. I have compiled all of the ways I know till now:

Showing Income in Cash

Another popular way of converting black into white money is showing income in cash like tuition income or any other professional fees. Also people make investment where it is allowed to invest in cash and where the maturity is tax free for example buying an insurance policy where you are not required to show all your premiums and the maturity is tax free. For example your insurance premium is 25000/- per annum and you can pay 6000 in check (shown in books) and remaining in cash, people increasing the proportion of premium paid in cash increasing as and pay entire premium in white for last two years before maturity. No ITO is going to check premium of more then last two years and it is a small example. People are paying huge cash premiums everyday. In case of this small premium, the cost of investigation exceeds the benefit to the exchequer so the ITO will give a test check for at the max last two years.

Showing Income of Spouse

People also show certain income which their spouse has earned. For example, you give certain amount of cash as a gift or for the purpose of making an investment to your wife. She invests that amount in some shares or any other kinds of investment and earns an income and returns back the capital received. The income is reinvested and then profit is made. In this case, the clubbing provisions are also not attracted and also if the spouse is not earning any income, then it can be kept at a sufficient level to avoid taxation liability. There are also many ways of showing house property income.

Paying tax at 30%

The best course of action people take is they pay tax @ 30% and as the next option they open as many files as possible in the family, taking advantage of HUF and elderly people in the family. In that way, they take advantage of slab benefit as well as extra exemption available to elders and female income tax assessees.

Also, whenever an asset is transferred and an income is earned, it is clubbed in the hands of the transferor. However when the income so earned is again reinvested in another asset and income by way of dividend or interest is earned, then such an income is not liable to be clubbed again in the hands of the original transferor.

Converting black to white by way of check

People also give the black money to a person (say a family member or a friend) and take a check from them. They show that as a loan receipt and thus they can temporarily convert their black money into white. Then they again give them a check as a repayment of loan and receive cash which converts white to black again, but during the time the loan is outstanding, their convert their black into white, but people who do this are not aware that Section 68 on loans is applicable and you will have to prove the creditworthiness as well as the genuineness of transactions to the IT Department or else the loan receipt will be treated as income from undisclosed sources.

Black into white by the way of sale brokers

Some people for turning money black into white money choose the easiest way to go to a share broker or a commodity broker and take sale and purchase bills and the transactions reporting in profits because they settle many of the transactions between brokers. The brokers charge 3% to 5% for profit bills and 2% for loss bills.

Above are a few ways people utilize in their personal finances so that they are able to save tax but besides paying tax at 30%, everything else is illegitimate and fraud in eyes of income tax department.

P.S.: I don’t recommend readers to follow any of these steps. I just want them to be aware regarding these false practices.

I encourage open discussion regarding this article but advices, opinions, suggestions which may land the opinion seekers into trouble later on are not encouraged.

I trust that a tax planning should be done in such a way that it can stand the test of the legal battle of course subject to debates.

Any person giving advices and opinions which are without any foundation or fundamentals are not encouraged.

I request all the readers to stick to these guidelines before applying the above ways into practice.