CREATE HUF TO SAVE TAX

Tax queries 2494 views 6 replies

CA CS CIMA Prakash Somani

Landmark Group

23517 Points Joined July 2007

CREATE HUF TO SAVE TAX

Key points in creation of HUF and format of deed for creation of HUF :

Under the Income Tax Act, an HUF is a separate entity for the purpose of income tax return.
The same tax slabs are applicable to HUF as to individual assessee.
You can not transfer your own assets/money into HUF.
If you have ancestral property and earning some income from this property, then it is better to transfer this asset to HUF and save tax up to exemption limit applicable to individual.
You can transfer the money received on sale of ancestral property /assets into your HUF.
The income from property of HUF can be further invested in instruments such as shares, mutual funds, etc. and will be assessed under HUF.
Existence of property or multiple members is not a pre-requisite to create HUF. A family which does not own any property may still have the character of Hindu joint family. This jointness is understood in terms of faith and food. This is because as a Hindu is born as a member of the joint family.
Any gifts received by the members of HUF (birthday, marriage, etc.) can be treated as assets of HUF.
The HUF is taxable as separate person under income tax hence one can save tax from basic exemption of Rs. 1.5 lakh. HUF will also gain from the tax slab structure of computing income tax.
Apart from basic exemption of Rs. 1.5 lakh, section 80C deduction up to Rs.1 lakh is also available.
For example, if you are in 30% tax bracket, then approx tax saving by creating an HUF will be as follows:
- Basic exemption up to Rs. 1,50,000 = nil
- Rs. 1,50,000-3,00,000 @ 10% = Rs. 15,000
- Rs. 3,00,000-5,00,000 @ 20% = Rs. 20,000
- 80C deductions Rs. 1,00,000
- Therefore total tax payable for HUF on income of Rs. 5,00,000 is only Rs. 35,000.
- If this income of Rs. 5,00,000 is taxed in individual hand @ 30% tax due is Rs. 1,50,000.
- Hence, you can save a total of Rs. 1,15,000 by creating an HUF and transferring ancestral property income and other income under HUF.

Replies (6)

There are many persons are creating more than one HUF like he is with his son , he is with her wife , in this way a single person is creating 10-15 HUF is it Legal to create such HUF under Income Tax Act.

Sumit Bansal

CA. BIJENDER KR. BANSAL

ACA B.COM

8153 Points Joined August 2007

Dear Sumit,

A person can't create more than one HUF.

A perosn may be member of two huf , but he can't create two huf .

For example,

A = Grand Father

B= Grand Mother

C = Father

D= Mother

E= Son

F= Son's wife

There is following HUF

1. ABC = C is member of ABC HUF , there it karta who create HUF is A, but after the death of A, C will become karta of this HUF.

2. CDE = As soon as C married, He may make new HUF i.e there Karta is C, But after death of C, E will become karta of this HUF also.

3. EF = As soon as E married, He may make a new HUF i.e There karta is E

i.e A person may be karta of 2 huf but he can't create 2 HUF together.

Rishab

A.C.A.

155 Points Joined May 2010

HUF can save tax for today!

If HUF is doing some business & its a Family Business then its OK!

But if you wan't to make a HUF just for Tax Savings, by transferring your income in HUF or by just showing your personal earned money as HUF's Income just for reducing TAX BURDEN think again, as there are certain complications as well in the future.

Just an instance: An client saved tax by making HUF and showing his business income in HUF, good amount of property & money got accumulated in the HUF he made a will for the HUF money & died later. He intended to bequeath all his HUF assets (which was actually his personal hard earned money) to only his younger Son who was a good person and took all care of his father and ailing mother (he had 3 sons and 2 daughters - daughters were married & other 2 sons are wanted in a drug scandal).

But as the said money belonged to HUF so legally the bequeth was not valid in Law. At last the Elder Son who was a drug peddler became Karta, who appropriated all the money of the HUF & wasted it all. (The deserving son got nothing)

So all I mean is plan diligently and carefully.

vkbothra

Learning

690 Points Joined January 2009

HUF Tax slab for AY 2010-2011

upto 160000, tax nil

160001-300000, tax @ 10%

300001-500000, tax @ 20%

500001-800000, tax @ 30%

no surcharge till 800000/-

;)

A.K.Agrawal

Investments & Finance

132 Points Joined November 2008

Negative points during span of time- 1. Revenue dept. making HUF taxation tuffer . A HUF will have to close its PPF A/C after 15 yrs. And it can not open a new PPF A/C. 2. Huf members start struggling for their portion & partition. Calling & performing DIVISION are very tuff jobs. Members do not reach any accord. 3. Merely husband & wife HUF might not be allowed to become a legal HUF without a child & that too a male child. With a female child HUF might be illegal. 4. After division, whether it would be a property of member's individual property or their smaller HUF'S Comments invited anxiously - A.K. AGRAWAL