One common way to avoid tax is by investing in the name of a non-working spouse or minor children. Money gifted to your spouse or minor child does not attract tax. However if the money is invested, the income it generates is clubbed to the income of the giver and taxed accordingly. In case of children there is a small exception of Rs.1500/year per child for up to two children. However the clubbing happens only at the first level of income. Which means if the amount earned as interest is again re-invested and it earns an income, it will be treated as income of the recipient & not the giver. Thus if you gift money to your spouse & invest it in any tax free investment option, the income though clubbed with your income will be tax free ( Equity/Balanced Fund with dividend option, Tax Free Bonds etc.). Your spouse can then re-invest the money & it will not be taxable in your hands.
It will be much simpler to invest in your parent’s name. If any or both your parents don’t have a high income, you can gift them money to invest. If a person is above 60 years of age up to Rs.3 lakhs per annum is tax free. Unlike investments made in your spouse or children’s name there is no clubbing of income in case of parents & it is perfectly legal to gift money to your parents who can further invest & the tax department should not have an objection.
Thus a person above 60 years can potentially earn Rs.3 lakhs per annum without any tax implication & if the money is invested in tax savings schemes u/s 80C, the income can be as much as Rs.4.5 lakhs. If you fall in the 30% tax bracket you can actually save you a lot of tax this way. The only point to keep in mind is that if the income of your parents exceeds the basic exemption limit it has to be reported (tax filed I mean) & you have to pay tax on it. But even then as long as your parent’s income falls in a lower tax bracket, cumulatively a lot of tax will be saved.