When we talk about tax planning, a new legal and effective way suggested by Tax Consultants is creation of HUF i.e. Hindu Undivided Family.
In India many people have a joint family and also a joint income, so as it is a joint income it cannot be taxed in the hands of any specific individual.
Therefore it is taxed in the hands of whole family separately. So if income is taxed in the hands of family, family has its separate PAN card as compared to individuals members of family.
The exemption limit for an HUF is Rs.2,50,000 for the A.Y.2019-20. You can check more detail on Income Tax Slab article.
You can take advantage of the HUF tax file in the matter of tax planning.
As per section 2(31), HUF is treated as a person. Being a separate person HUF is required to file ITR as individuals.
The due dates for filing ITR for HUF is:
|1.||In case of no audit under section 44AB||31 July of assessment year|
|2.||In case of audit under section 44AB||30 Sept of assessment year|
Procedure to create HUF and its capital
A Hindu male with his wife and children automatically constitutes the HUF. A new HUF come into existence in different ways, some of them are as under:
Basic Requirements for Existence of HUF
- Only One person/coparcener/member cannot form an HUF. As its name denotes Hindu Undivided Family thats why a single person, male or female, does not constitute a family. Once the coparcener/member/person marries, an HUF comes into existence.
- Joint Family continues even in the hands of females after the death of sole male member.
How to Create HUF & its Income Tax File
Open a bank account with the name of Hindu undivided family by making HUF Dead.
- HUF Deed: It is simple format where HUF members agreed to form a Hindu Divided Family by signing on it. Please download the format here.
- Apply for HUF PAN Card: As you all know HUF has its own identity. It is different entity from its members. So It requires separate Income Tax File. To make its separate income tax file, it requires PAN. You can apply HUF PAN by filing Form 49A offline or online. If you want to apply PAN offline go to this link. Apply HUF PAN Online
- Opening HUF Bank Account: While opening a Bank account in the name of HUF-banks always ask for a rectangular stamp which states the name of HUF and also Karta who is signing it. A round stamp is not accepted as per RBI guidelines.
- Transfer Assets to HUF: Now transfer money by gifts to HUF capital keeping in view clubbing provisions and tax on gifts under income tax act. And in this way HUF capital is created.
Tax benefits to HUF
Following are the tax benefits available to HUF:
- HUF can avail basic exemption of Rs. 2,50,000.
- Gifts that you receive up to Rs. 50,000 are exempt under a HUF and for gifts of higher amount tax benefit could be taken in the way that father who owns HUF has given such gift to his son and can avail exemption under section 64(2) and section 56(2).
- Deductions under section 80D for paying medical premium.
- Deductions under section 80DD up to Rs. 50,000 can be claimed for medical expenses incurred, expenses incurred on training, rehabilitation of a disabled member of a HUF.
- Deductions under section 80C can also be claimed by HUF. This section enables HUF to invest the income earned in any of the permissible securities under section 80C like PPF, NSC etc.
- Investments can be made from HUF’s income. Returns from these investments are taxable in the hands of HUF.
- HUF can pay salary to its members if they are working in joint hindu family business. The salary paid can be claimed as expense from the income of HUF
- Rental income from a property and Business income could be transferred to HUF and taxed accordingly.
- HUF can donate to recognized charity trusts and claim deduction under 80G and also claim deduction for interest on self occupied property of Rs. 1,50,000 under section 24 of Income tax act.
- Income from mutual funds or shares and long term gain on listed securities received is also exempt.
Incomes Which cannot be taxed as income of HUF
- Personal income of the members cannot be treated as income of HUF
- ‘Stridhan’ which is a absolute property of woman cannot be taxable as income of HUF.
- Income of individual property of daughter is not taxable in hands of HUF even such property is transferred to HUF by daughter.
- Income from property transferred by member to HUF which is self acquired without receiving proper sale consideration.
Important Points Related to HUF
- HUF has its own PAN and files a separate tax return.
- HUF is taxed as the same rate of individuals.
- HUF can receive gifts up to Rs. 50,000 only from strangers but from bigger HUF’s (HUF of Father) HUF can receive any amount of gifts.
- The greatest disadvantage of opening a HUF is that its members have equal rights on the property. That means property cannot be sold without consent of all members.
Tax Planning with HUFs
- HUFs have been used as very effective means of tax planning.
- Since HUF is deemed to be distinct entity, it is widely prevalent to transfer certain sources of income in the hands of HUF and small HUFs of the sons, in a legal manner.
- Thereby more assessees are created to dividie the tax burder.
- Besides, an HUF may be used as tax planning device in an mumber of other ways, viz. partitions, re-unions of the partitioned families, family settlements/arrangement, renunciations, relases by the existing HUFs, payment of salaries to Karta/members of the family, etc.
- HUF funds may be invested in any source of income such as shares, securities, share in partnership (through karta), house peroperty, etc.
- Deductions from gross total income of HUF are available as in the case of an individual generally.
- In case of non-assessee with no HUF files, an HUF file can be created by accepting gifts from outsiders to the HUF.
Example illustrating tax benefit with creation of HUF
Say, After the death of his father Mr. Mayank Jain decides to start an HUF with his wife, 2 sons as members. Property held by his father was transferred in the name of HUF. The property held by late Mr. Jain earns an annual rent of Rs. 12 lakh. Mr. Mayank has a salary income of Rs. 15 lakh.
Saving tax by creation of HUF
|Income from various Sources||Income of Mr. Mayank before formation of HUF||Income of Mr. Mayank after formation of HUF||Income of HUF|
|Standard deduction on house [email protected] 30%||3,60,000||–||3,60,000|
|Income from house property (b)||8,40,000||–||8,40,000|
|Total taxable income (a+b)||23,40,000||15,00,000||8,40,000|
|Deduction u/s 80C||1,50,000||1,50,000||1,50,000|
|Net Taxable income||21,90,000||13,50,000||6,90,000|
|Total Tax paid by Mr. Mayank before formation of HUF||4,96,460|
|Total Tax paid by Mr. Mayank after Formation of HUF (1+2)||3,01,790|
Tax saved by creation of HUF is Rs.1,94,670.
About the Author
Arpit Goyal is pursuing CA and B.com & also working as an article assistant in Gurgaon. He has an immense interest in Taxation. He loves to use technology to spread knowledge about taxation & accounts.