How to Save Tax by Forming an HUF?

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HUF or Hindu Undivided Family is one such avenue which can help you save tax.The term HUF stands for ‘Hindu Undivided Family’ and comprises of all descendants of a common male ancestor and includes their wives and unmarried daughters.. The term of HUF is not defined in income tax law; it is defined under the Hindu Law as a family.

An HUF is a separate legal person with a separate PAN card and requires separate tax assessment. Income generated from the assets owned by the HUF belongs to the HUF and taxed at the HUF level.

Section 2(31) of the Income Tax Act, recognises an HUF as a legal person and takes it under the definition of a taxable person.

According to Section 10(2) of the Income Tax Act, “any sum received by an individual as a member of a Hindu undivided family, where such sum has been paid out of the income of the family,” is exempted from the total income of the individual.

How is an HUF formed?

An HUF cannot be created under a contract, it is created automatically in a Hindu, Sikh, Buddhist or a Jain Family when a person gets married. HUF consists of a common ancestor and all of his lineal descendants, including their wives and unmarried daughters.HUF usually has assets which come as a gift, a will, or ancestral property, or property acquired from the sale of joint family property or property contributed to the common pool by members of HUF.

Although a HUF Deed can be signed for bank account and income tax purposes. An HUF deed is a written agreement mentioning the name of the Karta (head of the family), other family members, assets that is controlled by the HUF etc. The deed needs to be written on a stamp paper and signed by the Karta and other members.

A PAN card can be obtained and an account can be opened based on the deed.

Who can be members of an HUF?

All the members in your family, including your wife, children, their wives and their children. While the male members are called coparceners, the females are referred to as members. The senior-most male member is called the Karta (manager), and a typical HUF consists of a Karta, his sons, grandsons, and
great-grandsons (all of whom are coparceners), and their wives and unmarried daughters (all of whom are members).

What is the benefit of creating HUF?

Most tax exemptions and deductions which are available to an individual are also applicable to an HUF. So, one can benefit from keeping some assets separate in an HUF and then filing taxes as the HUF for the income generated by those assets.

Deductions under Section 80 and other exemptions can be claimed by the HUF in its income tax return.HUF can take an insurance policy on the life of its members.An HUF is taxed at the same rates as an individual.

So, if an individual is able to structure his taxable income or split his taxable income between his Individual self and his HUF, he can claim double benefits for deductions and expenses in both capacities, thereby substantially reducing his overall tax liability. An individual can file two income tax returns, one
in his individual capacity and second in the name of his HUF.

What kind of paperwork is required for an HUF?

  • Obtain PAN number in the name of the HUF.
  • Open bank account in the name of the HUF.
  • Open Demat account in the name of the HUF.
  • Use the HUF’s bank account to make all investments / expenses.
  • Maintain proper documentation and books of accounts to keep own investments and investments of HUF segregated.
  • KARTA of the HUF will have the power to sign all the documents on behalf of the HUF.
  • Filing income tax return separately for the HUF.

What are Drawbacks of an HUF?

The assets of the individual will now become the assets of the HUF as a family unit comprising of the individual and all members of the family. All members of the family would have a right on the assets unlike if the assets were owned by an individual in his own name. Therefore, proper caution should be exercised before transferring assets in the name of the HUF.

An Individual cannot transfer his assets to the HUF since the Clubbing provisions u/s 64 (2) of the Income Tax Act, 1961 would apply and the income earned from the transferred asset would continue to be taxed in the hands of the transferee.

Similarly, Partition of the HUF will have to be carefully thought through. The dissolution of an HUF will take place after the full partition of the assets of the HUF amongst its members. This may require execution of legal documentation to make it full proof.

An HUF can become an one-way street. Creating an HUF is easy, but diluting one can seem impossible. One must weigh the benefits with real life problems before creating an HUF.

  • Founder and Editor at "Knowledge"

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