How to Save Tax through HUF?

HUF

What is HUF?

HUF, or Hindu Undivided Family, is a legal entity in India that enables families to pool assets and avail tax benefits. By forming an HUF, families can benefit from separate tax treatment, which includes distinct deductions and exemptions. For example, if you and your spouse create an HUF, both you and the HUF can claim deductions under Section 80C, Basic Income exemption up to Rs. 7 Lac.

HUF: Your Smart Tax Solution Under the New Tax Regime

The primary advantage of forming an HUF is the ability to split income among multiple members, thereby reducing the overall tax liability. which allows for the application of lower tax rates and additional exemptions.

Under the new income tax regime, individuals face the challenge of not being able to claim deductions for rental benefits, LTA, medical expenses, insurance, child education fees, and housing loan interest. it does not provide deductions on these significant expenses. For individuals with high expenses in these areas, this can be a substantial burden.

However, an HUF account can be a blessing in such cases. By diverting extra income into the HUF, you can take advantage of the basic exemption limit of up to ₹7 lakh per year, along with additional deductions under sections like 80C, 80D etc.. This strategic move allows families to reduce their tax liability significantly while still benefiting from tax exemptions and deductions.

If you are looking to maximize your tax savings, consider setting up an HUF Account. For expert guidance and assistance in registering your HUF, contact Prakasha & Co., at 07019827351.

Who Can Form an HUF?

HUF can be formed by members of a family who belong to the Hindu, Jain, Buddhist, or Sikh communities. An HUF includes all members of the family, such as the spouse, children, and grandchildren. Just like marriage, forming an HUF has its own set of advantages and disadvantages.

Merits and Demerits of HUF

Merits of HUF

  1. Tax Efficiency: HUF has its own tax slab and deductions, much like an individual taxpayer.
  2. Easy Succession: Smooth asset transfer within the family.
  3. Capital Gains: Zero taxes on long-term capital gains (LTCG) up to ₹1 lakh from equities and equity-oriented mutual funds.
  4. House Tax Benefits: HUF can claim deductions for self-occupied house property.

Tax Savings from HUF

Category

Without HUF

With HUF

Income from Salary+others

₹20,50,000

₹12,50,000

Less: Standard Deduction

₹50,000

₹50,000

Taxable Income

₹20,00,000

₹12,00,000

Tax Payable – New Regime

₹3,12,000

₹93,600

HUF Income

₹7,50,000

Less: Standard Deduction

₹50,000

HUF Taxable Income

₹7,00,000

HUF Tax Payable

₹00

Total Combined Tax Payable

₹3,12,000

₹93,600

Net Tax savings Rs.2.18 Lac for Income group up-to 20.5 Lac

Legal Aspects of Multiple PAN

Previously, individuals sometimes held multiple PAN cards to evade taxes, which is illegal. However, holding an HUF PAN is legal and distinct from individual PANs, allowing families to manage their finances under two separate tax entities without legal issues

Demerits of HUF:

  1. Shared Control: Management of assets can become complex with family additions.
  2. Declining Relevance: Less practical with the rise of nuclear families.
  3. Tax Filing Requirement: HUF must file taxes every-year.
  4. Complex Dissolution: Requires all members consent to close the HUF, potentially leading to disputes

Eligibility to Form an HUF

Members of a family belonging to Hindu, Jain, Buddhist, or Sikh communities can form an HUF. The HUF consists of three types of members:

  1. Karta: Generally the eldest male (Female*) member, the Karta is the manager and decision-maker of the HUF.
  2. Coparceners: Members who get a share in the HUF properties by birth and can demand partition.
  3. Members: Entitled to benefits from the HUF’s income but cannot demand partition.

How to create HUF?

Establishing an HUF for Tax Efficiency

An HUF (Hindu Undivided Family) exist when a family unit is formed, typically through marriage, encompassing the individual, their spouse, and children. To formalize an HUF, one must create an HUF Deed, obtain a PAN card for the HUF, and open a separate bank account in the HUF’s name.

Forming an HUF is straightforward. Here are the steps:

  1. Create an HUF Deed: Draft a deed declaring the formation of the HUF. The deed should include details about the Karta, members, and the capital invested in the HUF.
  2. Apply for a PAN Card: Submit the HUF deed and other required documents to the Income Tax Department(NSDL) to obtain a PAN card in the name of the HUF.
  3. Open a Bank Account: With the PAN card and deed, open a bank account in the name of the HUF.

How to Utilize HUF by Families

For families where both husband wife are working and paying tax on there income, they can form a HUF to benefit. Here’s how:

  • Pooling Income: Transfer a portion of the income to your HUF account and make the investment through HUF account to reduce your tax liability from Bank Interest etc.
  • Basic Exemption Limits: Utilize the basic exemption limits upto ₹7 lakh under HUF.
  • Investment Income: Invest the HUF’s capital into various tax savings bonds, equity etc to avail exemptions and lower tax rates on LTCG.

Tax-Free Interest: Earn tax-free interest income up to ₹2.5 lakhs by transferring funds to the HUF’s bank account.

Documents Required for HUF Registration

  1. HUF Deed
  2. PAN Card Application Form (Form 49A)
  3. Proof of Identity and Address for Karta
  4. Proof of Address for HUF (Utility bill, rent agreement, etc.)

HUF Deed Format

A typical HUF deed should include the following:

  1. Declaration of formation of HUF.
  2. Names of Karta and all members.
  3. Source of HUF funds (e.g., ancestral property).
  4. Signature of all members.

Engaging professionals for HUF process ensures compliance and maximizes tax benefits. Notably, an HUF enjoys the same tax exemptions and deductions as an individual taxpayer, offering substantial tax planning advantages. Establishing an HUF can be a strategic move to reduce your tax payable

Process to Obtain HUF PAN Card

  1. Fill out Form 49A for PAN application.
  2. Submit the form along with the HUF deed and Karta’s identity proof.
  3. The PAN card will be issued in the name of the HUF.

Tax Implications for HUF

HUF is treated as a separate entity for tax purposes and follows the same income tax slabs as individual taxpayers. Deductions under sections 80C, 80D, and 80G are available to HUFs, though standard deductions and tax rebates for salaried individuals are not extended to HUFs. However, an HUF can claim deductions for amounts deposited in PPF accounts of its members.

HUF Tax Filings

  1. HUF needs to file an independent Income Tax Return (ITR) using its own PAN.
  2. It must maintain books of accounts and other relevant documents for income and expenses.

Financial Planning Using HUF

The real power of an HUF lies in its ability to facilitate tax planning and financial strategizing. Some examples include:

  1. Transferring Ancestral Property: Transfer ancestral property generating rental income to the HUF to reduce tax liability.
  2. Opening Demat Account: Open a demat account in the HUF’s name to distribute capital gains and reduce tax liability.
  3. Pooling Salary Income: Salaried spouses can pool their income into the HUF’s bank account to enjoy tax-free interest income up to ₹2.5 lakhs.
  4. Accepting Gifts: HUFs can accept gifts, with tax exemptions on gifts from members and specific limits for gifts from non-members.
  5. Home Loan Deductions: By adding the HUF as a co-borrower on a home loan, the HUF can claim deductions on home loan interest and principal repayments.

HUF Deed Format

Deed of Declaration of Hindu Undivided Family (HUF)

This Deed of Declaration is made on this [Date] at Bangalore, Karnataka.

BY

Ram Kumar, aged about [age] years, son of [Father’s Name], residing at [Address], hereinafter referred to as the “Karta” of the Hindu Undivided Family (HUF).

AND

Suma, aged about [age] years, wife of Ram Kumar, residing at [Address].

AND

Radha, aged about [age] years, daughter of Ram Kumar and Suma, residing at [Address].

WHEREAS

  1. Background: Ram Kumar, Suma, and Radha belong to a Hindu Undivided Family governed by the Hindu Law and desire to create a formal HUF entity.
  2. HUF Formation: The HUF shall be known as “Ram Kumar HUF”.

NOW THIS DEED WITNESSES AS FOLLOWS:

  1. Name of the HUF

The name of the HUF shall be “Ram Kumar HUF”.

  1. Declaration of Karta

Ram Kumar shall be the Karta of the HUF, responsible for managing the affairs of the HUF and making all decisions on behalf of the HUF.

  1. Members of the HUF

The initial members of the HUF are as follows:

  • Ram Kumar (Karta)
  • Suma (Member)
  • Radha (Member)
  1. Assets of the HUF

The initial assets contributed to the HUF are as follows:

  • Ancestral property located at [Property Address]
  • Initial capital of ₹[amount] contributed by Ram Kumar
  1. Purpose and Activities

The HUF shall carry on the following activities:

  • Investment in properties and securities
  • Management of ancestral properties
  • Any other activities permissible under Hindu Law and Income-tax Law
  1. Management and Control

The Karta shall have full control and management of the HUF’s assets and properties. All decisions regarding the HUF shall be taken by the Karta in consultation with the members.

  1. Succession

In the event of the Karta’s demise, the next eldest male member shall become the Karta. If there is no male member, the eldest female member may become the Karta as per Hindu Succession (Amendment) Act, 2005.

  1. Bank Account

A bank account shall be opened in the name of the HUF, “Ram Kumar HUF”, with [Bank Name], [Branch], Bangalore, Karnataka.

  1. PAN and Income Tax

The HUF shall apply for a Permanent Account Number (PAN) with the Income Tax Department and file tax returns as a separate entity in accordance with the provisions of the Income-tax Act, 1961.

  1. Division of Income and Expenses

The income generated by the HUF shall be used for the benefit of all members. The expenses incurred by the HUF shall be met from the HUF’s funds.

  1. Dissolution

The HUF shall continue to exist until it is formally dissolved by mutual consent of all the members or by an order of the court.

  1. Dispute Resolution

Any disputes arising within the HUF shall be resolved amicably through mutual discussion. If unresolved, the disputes shall be referred to arbitration in accordance with the Arbitration and Conciliation Act, 1996.

  1. Governing Law

This deed shall be governed by and construed in accordance with the laws of India, specifically the Hindu Succession Act, 1956, as amended, and the Income-tax Act, 1961.

Declaration

We, the undersigned, hereby declare that the above statements are true and correct to the best of our knowledge and belief.

Signature:

Ram Kumar (Karta)
[Signature]
[Date]

Suma (Member)
[Signature]
[Date]

Radha (Member)
[Signature]
[Date]

Witnesses:

  1. [Witness Name]
    [Signature]
    [Address]
  2. [Witness Name]
    [Signature]
    [Address]

This deed is executed on [Date] at [Place] in the presence of the above-mentioned witnesses.

For further clarification or professional advice, reach out to Prakasha & Co., Bangalore, leading legal and tax advisory services in Bangalore

FAQ on HUF

Can an HUF claim tax deductions under Section 80D for health insurance?

Yes, an HUF can claim deductions under Section 80D for health insurance premiums. Even if you and your spouse have opted for the new tax regime individually, the HUF can opt for the old tax regime and claim deductions for health insurance premiums paid for its members.

Can Women Become Karta?

Yes, as per the amended Hindu Succession Act, women can become the Karta of an HUF. This amendment recognizes the eldest female member of the family as the Karta, ensuring gender equality in family business management.

Does the interest income from an FD in an HUF's name attract clubbing provisions?

If the initial capital, such as ₹25 lakhs, is contributed to the HUF at the time of its creation, the interest earned from the FD will be considered HUF's income and not be clubbed with the income of the individual members. Clubbing provisions do not apply to the income generated from the initial capital contributed during the formation of the HUF.

Will transferring money to the HUF account reduce my taxable income?

Transferring money to the HUF account does not reduce your taxable salary. However, any income such as interest generated from the transferred funds would be taxable at the HUF's tax rate, which might be lower than the individual member's tax rate.

Are there clubbing provisions for income transferred to the HUF account?

Clubbing provisions apply to income generated from personal movable/immovable property transferred to the HUF. However, if the HUF is created with an initial corpus, and subsequent contributions are made as gifts, the income generated from these contributions will not be subject to clubbing provisions

How can one contribute capital to an HUF without ancestral property?

Even without ancestral property, you can contribute capital to the HUF by transferring funds as gifts. Members of the HUF can pool capital, and such gifts from members are exempt from tax in the hands of the HUF

How to transfer initial capital to an HUF's bank account?

The initial capital can be transferred to the HUF's bank account as a gift from the members. These contributions should be documented properly in the HUF deed and other HUF documents. Additional capital can be added later as gifts.

Can an HUF create a company under its name?

An HUF cannot create a company in its name as a company requires individual directors. However, members of the HUF can create a company, and the HUF can hold shares in it.

Can a husband and wife alone form an HUF and claim tax benefits?

Yes, a husband and wife can form an HUF and claim tax benefits even if they do not have children.

How to ensure clubbing provisions do not apply to an HUF?

To avoid clubbing provisions, the HUF should be formed with an initial corpus, and subsequent contributions should be made as gifts. Clubbing provisions apply to income generated from personal property transferred to the HUF but not to the income from initial corpus or subsequent gifts

How can money be withdrawn from an HUF?

The HUF can transfer money to its members as gifts. Additionally, the HUF can purchase assets in its own name, benefiting its members

Can an HUF start its own business like a company?

An HUF cannot start its own business in the manner that a company can. However, an HUF can engage in business activities under its own name. The business income will be assessed in the hands of the HUF, and the Karta, who is the manager of the HUF, will manage the business.

Can an HUF become a shareholder in a private limited company?

Yes, an HUF can become a shareholder in a private limited company. The shares will be held in the name of the HUF, and the income generated from these shares, such as dividends, will be assessed in the hands of the HUF.

What happens if an HUF member marries someone from a religion other than Hindu?

If an HUF member marries someone from a religion other than Hindu, the non-Hindu spouse cannot become a member of the HUF. However, their children will be considered members of the HUF and can enjoy the benefits and rights associated with the HUF.

Can children be added as coparceners in an HUF?

Yes, children can be added as coparceners in an HUF by birth. Both sons and daughters are considered coparceners and have equal rights in the HUF properties. They can demand partition and enjoy the benefits and rights associated with the HUF

What is the age limit to join an HUF as a member?

: There is no specific age limit to join an HUF as a member. Any individual born into an HUF becomes a member from birth. However, to be an active coparcener with decision-making rights and the ability to demand partition, the individual must be a legal adult, which is 18 years of age in India.

Can an HUF receive gifts from non-members?

Yes, an HUF can receive gifts from non-members. However, such gifts are taxable if the total value of gifts received from non-members exceeds ₹50,000 in a financial year. Gifts from members of the HUF are exempt from tax

What is the age limit to join an HUF as a member?

: There is no specific age limit to join an HUF as a member. Any individual born into an HUF becomes a member from birth. However, to be an active coparcener with decision-making rights and the ability to demand partition, the individual must be a legal adult, which is 18 years of age in India.

Is the HUF subject to clubbing provisions under Section 64(2) of the Income Tax Act if an individual transfers an asset (movable or immovable) or converts such property into HUF property?

Yes, under Section 64(2) of the Income Tax Act, if an individual transfers an asset (movable or immovable) to the HUF without adequate consideration or converts their individual property into HUF property, the income derived from such transferred or converted property will be clubbed with the individual’s income. This means the income generated from such assets will be taxed in the hands of the individual who transferred or converted the property, not the HUF. How to make tax plan in Clubbing and Gift Provisions: 1. Initial Capital Contribution: An HUF can build a corpus at the time of incorporation. Any capital raised and contributed at the time of incorporation is treated as HUF’s capital, and clubbing provisions shall not apply. This allows the HUF to have a strong financial foundation from the outset. 2. Post-Formation Contributions: After the HUF is formed, members can pool capital into the HUF and transfer capital as a gift. Gifts from members are exempt in the hands of the HUF. The HUF can then use this capital to generate income without the income being subject to clubbing provisions. Transfer of Personal Property: If members transfer any personal movable or immovable property to the HUF, the income generated from such property will be clubbed with the individual’s income as per Section 64(2). This ensures that the transferor is liable for the tax on income generated from the property they transferred, preventing potential tax avoidance through asset transfers.

Can the Karta of an HUF draw a salary for managing the HUF, and is it taxable?

Yes, the Karta of an HUF can draw a reasonable salary for managing the affairs of the HUF, provided it is justified and the payment is genuinely made for services rendered. This salary is taxable as income in the hands of the Karta and is allowed as a deductible expense for the HUF.

While forming an HUF involves certain complexities, it can be a powerful tool for tax planning when used strategically. Whether it’s managing ancestral property, leveraging multiple income streams, or facilitating investments, an HUF offers significant advantages for those who plan meticulously and take a long-term view.

For further professional advice, reach out to us or Prakasha & Co.

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