FORM HUF, SAVE TAX!!!

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

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HUF Helps Couples to Save Tax

When Shashank and Mitali got married, they did not bother much about their finances. After all, both were well qualified and had well paying jobs. In addition, Shashank also earned rental income from ancestral property. But after seeing the huge amount they paid as taxes (after investing in the usual tax saving instruments), they spoke to Shashank's former classmate, who is a practising chartered accountant. That is when they realised that they could save taxes by setting up a Hindu Undivided Family (HUF).

The HUF concept is not new in India, and is one of the best ways to save tax. Any married man from the Hindu, Jain, Sikh, or Buddhist community can form an HUF, and will act as the "Karta" or the head of this family. According to Indian law, an HUF will be considered as a separate entity from the individual for tax purposes, which benefits married couples from these communities to save a substantial amount on taxes.

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), Section 54 (capital gains) and so on.

Tax slabs applicable to income of an HUF is similar to that of any individual taxpayer, with the basic exemption at Rs 2 lakh. First, any two family members with the karta (male member of the family) can create an HUF. For a married individual, family will mean wife / husband and children, if any.

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 5 lakh, and gets rent on ancestral property of Rs 3 lakh, as an individual he will be paying taxes of approximately Rs 1 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 20,000 as taxes as an individual and the HUF will be liable for no taxes (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 80,000.

Let us look at a more detailed example to see how a HUF can save one's taxes.

Forming of an HUF is relatively simple, with all married men and their wives becoming an HUF automatically. There are, however, a few simple procedures to be followed, such as executing a deed on a stamp paper to transfer assets to the HUF - this can be property, cash, jewellery, etc. One will also have to get a PAN card in the name of the HUF and open a bank account. There can be multiple instances of HUF's in each family, with each married couple being part of their own HUF. There are also cases with women only HUF's, where the Karta has passed away, and left behind only female descendants - in such a case, the daughter assumes the role of the Karta.

Transferring money into an HUF is not as easy as it seems as one cannot just transfer money or assets into the HUF name, as this gets combined into a single entity under the existing law and taxed as such. The ideal way to setup a HUF is to put some of the gifts (cash, jewellery, etc) received at one's wedding into the HUF. The other way is to set up the HUF using ancestral property from a will - though in this case the will should specify that the property will go to the HUF and not the individual.

Another pitfall one should be aware of is that while transferring gifts to the HUF, there is no exemption on receiving gifts from specified relatives like in the case of an individual - the HUF is liable to pay taxes on all gifts. However, since the HUF gets tax benefits like an individual entity, gifts of up to Rs 2 lakh (limit can go up to Rs 3 lakh if the tax benefits under Section 80C are fully used) are exempt from taxation.

Assets and liabilities in the name of the HUF will belong to the HUF and this will be treated as a separate entity. For example, if a business is being run under an HUF all business expenses will be deducted from the HUF income. This includes any salary paid to family members who are part of the HUF.

Additionally, a member of an HUF has to maintain books of accounts and all paperwork for the HUF separately. Transfer of assets to HUF happens only one-way. You can create assets for the HUF, but these can be taken out only by dissolving the entity. However, financial assets, gold and cash, can easily be distributed among members.

But there are some disadvantages also by forming an HUF. For instance, if you are looking to sell a property that is in an HUF's name, it may not find many takers as everybody wants a clear property title. If there is a legal dispute around the property, then selling it can become impossible.

An HUF can be dissolved if all the members agree. A partial dissolution is not possible.

This article is written by CMA Samir Biswal. He can be reached at cmasamirbiswal@gmail.com

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Formation of HUF for tax benefit: All you want to know

A Hindu Undivided Family (HUF) offers specific advantages as far as taxation is concerned. The Income Tax Act and Wealth Tax Act recognise the HUF as an independent assessable or taxable entity. Hence, HUFs enjoy all deductions and exemptions under the IT Act independent of the income and tax liabilities of its members. The Hindu Law defines the HUF as a family, which consists of males lineally descended from a common ancestor and includes their wives and unmarried daughters.

Members: An HUF is automatically constituted after marriage. It can also be formed by partition of an existing HUF into multiple units. A suitable name needs to be given to the HUF, taking into consideration the prevalent laws and the business that it intends to undertake.

Corpus: An important requisite for the constitution of an HUF is its corpus or capital. This capital is separate from the assets owned by its members. The property received by way of a will in favour of the HUF can become the corpus.

Deed: Though it is not mandatory to have a deed for the formation of an HUF, it is advisable to execute one from a legal and taxation perspective. It should include details of the karta, members of the HUF consisting of coparceners, and other family members, the corpus as well as the business of the HUF.

PAN: An HUF has a separate PAN and the karta must apply for one. The PAN needs to be quoted while making investments and carrying out financial transactions of the HUF.

Points to note

> The Hindu Law comprises two schools of law which govern the HUF. These are Dayabhaga school, prevalent in West Bengal and Assam, and Mitakshara school, which is prevalent in the rest of India.

> The karta must file the income tax and wealth tax returns on behalf of the HUF, in addition to his personal tax returns.

Source: Economic Times

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How to save tax by forming HUF??

A Common Question which a Taxpayer usually asks a Chartered Accountant at the time of filing his Income tax Return;

How to save tax legally by forming HUF?
The Hindu Undivided Family (HUF) structure is a very effective way to save tax and a lot of people are eligible to create HUFs but somehow there is very little awareness about it.

What is HUF?
Hindu Undivided Family is a separate Tax Entity recognized under Income-tax Law. It may be noted here that as per the definition in section 2(31) of the Income-tax Act, 1961 a Hindu Undivided Family is treated as a separate Tax Entity.

The Income of an HUF can be assessed in the hands of the HUF alone and not in the hands of any of its members. The senior most member of the family who manages the affairs of the family is called the Karta. Minimum two people (at least one male member) are required for the HUF to come into an existence.

How to create HUF?
Sometimes a question arise in the minds of a tax payer that now a days it is not possible to create new tax entity in the form of Hindu Undivided Family. Well if we screen very carefully all the provisions as are contained in the Income-tax Act, 1961, we come to the conclusion that there is no provision existing in the Statute as on today prohibiting creation of a new tax entity of your HUF. However, what is prohibited now is gifting of the money by the members of the HUF to their own HUF. Hence, from practical angle the tax payers will be happy to note that it is possible today to create a new tax entity in the name of your HUF.

How to put funds in HUF?

There can be numerous ways, some popular ways are-

1. One can receive money by way of gift from the friends or relatives.

2. Parents can also gifts fund to an HUF via gift deed clearly specifying gift is directly towards son’s HUF not towards son.

3. Gift can be accepted from stranger but only upto INR 50,000 (section 56, income tax act, 1961)

Benefits of forming HUF:1. HUF is eligible for deduction under 80D (Insurance Premium paid on health of member), 80G (Donation), 80L (income from bank and post office deposit), 80C (assorted list of items) under Income tax act. 1961

2. HUF also enjoys exemptions under section 54 and 54F in respect of Capital gains.

3. HUF also gets advantage of slab rate taxability.

4. Also, under Wealth Tax Act, 1957 HUF is treated as a distinct entity and enjoys separate taxability.(general exemption of Rs. 15 lakh)

Specific Tax Planning tools for HUF:

Create more assessable units by partition of HUF-The tax liability can be reduced by partition of the HUF. This can be easily done in a case where the partition results in separate independent taxable units.Remuneration to Karta & members- pay remuneration to Karta & its members for the service rendered by them to the family business. The remuneration so paid would be allowed as deduction from the income of HUF.

Making loans to member of HUF- It can be used as an effective tool in tax planning. Loan can be made with or without interest.

Hindu Undivided Family is a wonderful tool of legal tax planning in a family. So if you do not have a Hindu Undivided Family tax entity in your family, then it is worthwhile that you devote some time and energy that you try to go in for creating a new tax entity of your Hindu Undivided Family.

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