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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