HUF-The Saga

HUF - A Tax entity for your benefit
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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.