HOW TO SAVE TAX BY FORMING HUF??
An HUF is a separate entity for
taxation under the provisions of Income Tax Act, 1961. There is no doubt about the usefulness of the HUF as a tax planning
tool which is entitled to the same exemptions as any other individual taxpayer
and enjoys the same deductions that an individual enjoys.
What is HUF?
HUF means Hindu Undivided Family
and as the name suggests, HUF is a family of Hindus. However, even Buddhists, Sikhs
and Jains are regarded as Hindus and they can also form HUF. The income of HUF
can be assessed in the hands of HUF alone and not in the hands of any of its
members. The senior most male member of the family who manages the affairs of
HUF is known as KARTA.
How to create an HUF?
1. To
create HUF, you need to apply for PAN card. HUF has a separate PAN card and
Karta must apply for it.
2. Open
a HUF bank account.
3. Execute
a deed to a stamp paper to transfer the assets to HUF- this can be property,
cash, jewellery etc.
Benefits of forming HUF
If you are paying too much tax and all possible deductions have been
availed of, the only way to bring down the tax liability is by starting an
Hindu Undivided Family (HUF). However, you can do so only after you get
married.
1. HUF is a separate entity in itself and
qualifies for all tax benefits under Section 80C (up to Rs 1 lakh), 80D (health
insurance premium), 80G (donation), 80L (income from bank account) of chapter
VI of Income Tax Act,1961.
2. HUF also enjoys exemption under section 54
and 54F in respect of capital gains.
3. Under wealth tax act HUF is treated as
distinct entity and enjoys separate taxability.
4. Tax slabs applicable to income of an HUF
is similar to that of any individual taxpayer, with the basic exemption of Rs 2
lakh.
5. If
you have ancestral property and earning some income from this property then it
is better to transfer such property to HUF and save tax upto exemption limit
applicable to individual.
Let us look at a more
detailed example to see how a HUF can save one’s taxes.
An HUF can be used for any purpose apart from receiving salaries, which
means that one can form an HUF to keep ancestral property, or to run a
business.
For example, if a married man has a salary of Rs 10 lakh, and gets rent on
ancestral property of Rs 6 lakh, as an individual he will be paying taxes of
approximately Rs 2.57 lakh (assuming Rs 1 lakh is invested under section 80C).
However, if he shifts the property to an HUF, then he will be paying only Rs
72100 as taxes as an individual and Rs.10300 as taxes as an HUF (assuming that
both the individual and the HUF has invested Rs 1 lakh under section 80C). This
results in a tax saving of around Rs 1.75 lakhs.
By Forming HUF, an
Individual divides his tax liability between two entities. This reduces his tax
burden.
This Article has been Shared by Student of ICAI Palak
Aggarwal. She can be reached at aggarwal.palak2809@gmail.com
