HUF account for efficient tax planning

Aisha (Finance Professional) (7667 Points)

12 February 2008  
If tax hawks give sleepless nights, then the law of the land also opens a window for respite. But due to low awareness of legal matters, most of us end up coughing extra money, which otherwise could have been saved easily. Take the case of 38-year-old Ajit Banerjee who recently purchased a luxury four-wheeler. Banerjee, a Hindu by religion, registered the car in the name of a business owned by his brother.

The purpose was to reap in the benefits of Hindu Undivided Family (HUF) Act, so that not only Ajit could buy his dream machine but also help his brother do tax planning for his firm by claiming depreciation on the car. As under the HUF Act, deductions from gross total income are done in the same manner as for an individual.

Simplifying the law

So in absolute terms what is an HUF? “HUFs are automatically born, which are euphemistically referred to as creation of ‘HUF’,” explains Sandip Mukherjee, executive director, PricewaterhouseCoopers. According to analysts, an HUF consist of at least two members (of which at least one should be male), and is automatically born with the ancestral property being received from or belonging to three generations above (example: if Mr X, a married man, receives ancestral property belonging to his great grandfather, the same will automatically be considered as property of Mr X’s HUF).

“Alternatively, the HUF could also get formed with the asset gifted or given, preferably by a lineal ascendant, with a specific direction for the use of HUF,” adds Mukherjee.

Technically speaking, an HUF always exists in a Hindu family and never gets ‘created’. However, from a tax perspective, an HUF is created when it gets vested with assets, property or any income generating activity.

Family advantage

As per tax experts, the most significant advantage is that any income received by an individual as a member of the HUF from its corpus, is not taxable in his/her individual capacity, as it would be taxable in the hands of HUF. The income of the HUF is eligible to the same slabs and basic exemptions as available to an individual. The HUF is also eligible for deductions under Section 80C.

“Hence, if the total personal income of an individual is split into what is assessed in his hands and what is assessed in the hands of the HUF of which he is a member, there is an overall tax savings,” says Amitabh Singh, partner, global tax advisory, Ernst & Young, India. However, you should also keep in mind that once income of family is assessed as an HUF, it would continue to be assessed as HUF income, until such time the HUF is partitioned completely.