Every individual taxpayer expects his/her Financial Planner/Advisor to suggest ways to save more and more taxes. Now what if there is nothing left over if you have already covered all exemptions/deductions under popular sections like 80C, 80D, 80E, 80G, 24b etc. But, if I say still there is a scope of saving income tax which is obviously within the purview of IT Law. Sounds Good! Yes, there is an option through which you can save taxes little more. This is by way of forming a “HUF (Hindu Undivided Family)”, where you can reduced overall tax liabilities or pay less if you are already exhausted with all of the available exemptions & deduction under IT Act.
You might have heard about this before, but never thought of how this can be a tool to save tax? In this article I would like to talk about HUF in details and its pros and cons. Let us first understand the basics of HUF and then we will also find out how to save tax using its features.
What is HUF (Hindu Undivided Family)?
HUF concept is not new in India. Hindu Undivided Family concept comes from joint family of Hindu where there are many members earning separately and some income arises from jointly like rent received from jointly owned property etc.
Income tax act recognize HUF as a separate tax payer unit. “A HUF is a separate entity for taxation under the provisions of S.2 (31) of the Income Tax Act, 1961. This is in addition to an individual as a separate taxable entity. This indicates that a person may be assessed in two different capacities as an individual and as a Karta of his HUF.”
Who can set up HUF?
- As name suggests, Hindu family but even Buddhist, Jains, Sikhs also can form HUF.
- One should be married to form HUF. One male member is enough to create HUF for example a father and his unmarried daughter may form HUF.
- Residential status of the HUF would depend upon where the control and management of the affairs of HUF is situated means It can be resident or Non resident as well.
How to form HUF?
HUF consist of;
Karta: Karta is generally the father of the family who has right to do things or take decision behalf of the family. He also called as manager of HUF.
Co-Parceners: coparceners are the persons who has right to demand the share of the assets of family if he/she want to separate. Not all members are co-parceners, it can be like below.
- Holder of Property first time.
- Sons & Daughters*
- Great Grandsons
*Daughters as coparceners. In recent times, some states like Maharashtra and Tamil Nadu have amended the Indian Succession Act to provide that all daughters who were unmarried as on the date of the amendment would be regarded as coparceners in much the same manner as the sons in the family. Subsequently, in these states, unmarried daughters as well as daughters married after the date of the amendment (in the case of Maharashtra, it was June 22, 1994) were regarded as coparceners. They are, therefore, eligible to demand partition of an HUF, and receive a share (equal to that of male coparceners) of the HUF property.
Members: All the members in family, including wife, children, their wives and their children. While the male members are called coparceners, the females are referred to as members.
A simple example may clarify the structure on a HUF; Let’ see
Rohit is married to Deepika and have two minor children, Ankita (daughter) and Akash (son). Rohit’s annual income is Rs. 25,00,000 and Deepika Rs. 17,00,000. Rohit has inherited an ancestral property, an apartment, which is on rent (annually Rs. 4,20,000). If Rohit forms a HUF, with him the Karta (head of the HUF), his children will be called co-parceners and his wife will be a member. The first benefit Rohit, will have that the rent income of Rs. 4,20,000 which was hitherto assessed as part of his income and now be carved out and shown as HUF income, and the HUF will be assessed separately as another entity and will have the benefit of the exemptions of IT Act similar to those received by Rohit or Deepika.
Some other basic criteria while forming HUF:
- To form an HUF all you have to do is to get Married. The HUF is created the moment you get married
- Only one member or co-parcener cannot form an HUF
- The joint family continues even in the hands of females after the death of the sole male member
- An HUF need not consist of two male members. One male member is enough. For example, a father and his unmarried daughters may form and HUF.
HUF can to be created keeping in legal and financial point of view in mind:
- Executing a deed,
- Getting HUF PAN
- Opening a bank A/c in the name of HUF.
Documents required for opening HUF account:
HUF will have a unique PAN card; this PAN card along with the PAN of Karta should be produced. A declaration form will be provided where every member has to make a signature stating the name of Karta and declare. They are the only members of HUF. Karta to have sole authority over HUF account. Every transaction on behalf of HUF account, made by each member of the family is governed by karta. Other documents are;
- Residential proof of Karta
- Identification proof of Karta
Apart from the points mentioned above there can be other documents or conditions depending on the bank where HUF account is opened. Signature of karta will be required for every transaction from the bank. These accounts are similar to individual saving bank accounts. In this account a corpus is created where every family member can pool their income. Such Corpus can be divided only on agreement of every co-parcener of the family.
The drawbacks of HUF account can be;
- There can be a strong sense of insecurity among members that can keep the corpus of the account empty and as long as corpus is empty the account is non functional.
- If any of the members of HUF is willing to for a partition then the process of partition in deposit in HUF account can turn to be tedious (problematic).
Caution should be taken that personal assets and funds are not transferred to the HUF account, as income generated from it shall later be clubbed under personal income under Section 64 (2).
How to pump funds into HUF name?
- As you read above member of HUF cannot push own fund into HUF name to take tax benefit because of section 64(2) clubbing provision but it provision can be bypassed if HUF invest the money in tax saving instruments. Tax free income can be reinvested to earn taxable income.
- HUF can take gift from stranger limit upto Rs. 50,000 under section 56.
- Gift from members.
You might want to read: Know the tax liabilities on the Gifts you receive from your Near & Dear
What assets should be taken as HUF Assets?
There is very important question is that what assets is HUF assets and individual’s assets. Assets received in the below manner would be treated as the assets of an HUF:
- Property acquired with the aid of joint family property;
- Assets allotted on partition of Larger HUF.
- Assets received as gifts by the HUF. Such gifts could be received from close relatives or close friends.
- Assets bequeathed by a will that specifically favours the HUF.
Although it is possible for a member of the HUF to transfer his or her individual assets to the HUF, such a transfer isn’t beneficial from the tax point of view. This is because there is no transfer of the tax liability on the income from such assets. The income would continue to be taxed in the hands of the individual who has transferred the assets, due to the tax provisions governing the clubbing of such income with the income of the transferor.
Taxation Point of View:
- A Hindu Undivided Family (HUF) is a separate entity for taxation under the provisions of sec. 2(31) of the Income Tax Act, 1961. This is in addition to an individual as a separate taxable entity; it means that the same person can be assessed in two different capacities viz. as an individual and as Karta of his HUF.
- HUF gets the advantages of Income Tax Slab rate taxability and also qualifies for deduction u/s 80D (insurance premium paid on health of its members), 80G (Donation), 80L (income from bank and post office), 80C under the Income Tax Act 1961. It can also take exemptions under Section 54 and 54F with respect to Long term capital gains.
- Under Wealth Tax Act, 1957 HUF is treated as distinct entity and enjoys separate taxability.
- Any income received by an individual as a member of the HUF out of the income of the family or out of the income of the estate of the family, is not taxable and exempt u/s 10(2) of the act.
- Also gifts collected up to a worth of Rs 50,000 will be tax free. A father who owns a HUF account can gift a property or money of higher worth to a son who owns a smaller HUF account; but he should specify that the gift is for the son’s HUF and not to him as an individual. Under section 64(2) and 56(2) tax benefits can be enjoyed in such instance.
- The HUF accounts cannot be opened with joint holders.
- No nominee can be appointed for the HUF accounts.
HUF will be a good option for persons who have sufficient income and savings and who also have some ancestral property too (which could be treated as family assets for HUF). Of course before forming a HUF one should calculate the tax benefits clearly and then take a calculated decision.