Sep 18, 2013, 11.08 PM | Source: Moneycontrol.com

Can creating a HUF save more tax?

Ramalingam K of holisticinvestment.in discusses the possibilities of saving more tax if a Hindu Undivided Family (HUF) is created. However, he also discusses the cons of having this sort of a business setup.

Ramalingam K

Director & Chief Financial Planner

More about the Expert...

Ramalingam K
Holistic Investment

Once, our venerable Finance Minister, P Chidambaram, said, “Left to God, even he will not like to pay Income Tax”. Though as a responsible citizen of our country, we should pay our income taxes on time and should not avoid paying it.

However, if the Income Tax Act, 1961 provides legal opportunities to save Income tax, it will not be prudent if you are not taking benefits of such provisions. HUF is an entity, which has been given certain exemptions, quite similar to an Individual by the IT Act. If you are a born Hindu or a Sikh or a Buddhist or a Jain, you can take benefit of these provisions, and if possible you should take it.

Also read: All about tax laws related to stock valuations

What is a HUF?

The Income Tax Act 1961 provides that a HUF (Hindu Undivided Family) is separate unit like an individual and is too assessed accordingly. A HUF can claim tax benefits under the income tax act as Wealth tax act.

A HUF is eligible for those exemptions that are available to a resident Indian who is not a senior citizen. It can own property and also have its own business.

Who all are included in the HUF?

The HUF includes those persons who, by birth, acquire an interest in some joint family property. It also includes all lineal descendants of these persons, and their wives, and children, both sons and daughters. Even married daughters can remain a part of the HUF, while being a member of her spouse’s family HUF.

What are the Income Tax Benefits in forming a HUF?

To understand the income tax benefits (we are not discussing the wealth tax benefits, as they too are available) additionally available by forming a HUF, let us take an example of a family, which is now common, the nuclear family.

Naresh is married to Priya and have two minor children, Jaya (daughter) and Bhargava (son). Naresh’s annual income is Rs10, 00, 000 and Priya Rs10, 00, 000. Naresh has inherited an ancestral property, an apartment, which is on rent (annually Rs3, 00,000).

If Naresh forms a HUF, with him the Karta (head of the HUF), his children will be called coparceners and his wife will be a member. The first benefit Naresh, will have that the rent income of Rs3, 00, 000 which was hitherto assessed as part of his income and now be carved out and shown as HUF income, and the HUF will be assessed separately as another entity and will have the benefit of the exemptions of  IT Act similar to those received by Naresh.

This will lead to substantial reduction of Income tax being hitherto paid by Naresh and the HUF will pay a much smaller amount of Income tax on this income of Rs3,00,000/- after enjoying the exemptions available.

Also, the gifts received by the coparceners/member (beyond the exemption limit) can be shown as received by the HUF, thereby reducing the income tax burden of both Naresh and Priya.

Now, you may invest the HUF income in LIC policies, PPF accounts, ELSS instruments in the name of Karta, coparceners or member of the HUF and it will get the income tax deductions under Section 80C.

How to form a HUF?

The following steps are required to form a HUF:

(i) Open a bank account in the name of Hindu Undivided family titled “Naresh HUF” with a rubber stamp, ID Proof, residence proof and the proof of the members of the family of HUF.

(ii) The rubber stamp should be rectangular carrying the name of the HUF and that of the Karta

(iii) Then apply for PAN (Permanent Account Number) from the income tax authorities.

(iv) Transfer the rent income received from the ancestral property along with the excess gift amount received by the HUF members (Karta, coparceners and members)

Disadvantages of HUF

Though a significant amount of tax can be saved by forming a HUF, there are few disadvantages of HUF which should be taken into consideration. Whenever an asset is transferred to HUF it remains with it. Only when the coparceners will demand a partition of HUF, the property can be shared by the coparceners.

HUF property cannot be mentioned in the WILL. In case of Naresh HUF, the ancestral property transferred to HUF will remain part of HUF and Naresh later cannot transfer to his wife or son or daughter. Of course after his death, his son will become the Karta, but other members will enjoy the benefits and income of the HUF.

Who should actually form a HUF?

HUF will be a good option for persons who have sufficient income and savings and who also have some ancestral property too (which could be treated as family assets for HUF). Before forming a HUF one should calculate the tax benefits clearly and then take a calculated decision.

It is advisable to hire a financial advisor, well versed in forming HUF and who will be able to give the pros and cons so that an informed decision can be taken about formation of HUF.

The author is Ramalingam K, CFP CM is the Chief Financial Planner at holisticinvestment.in, a leading Financial Planning and Wealth Management company.

ADS BY GOOGLE

Ask the Experts

Get your Personal Finance queries answered

  • Q

    Interest rates are going to go down. And all my fixed deposits will be maturing next year. I will have to renew my fixed deposits next year at lower rate of interest. What is the way out?

    A

    Interest rates keep fluctuating due to various micro- and macro- economic factors. There is never an ideal rate of interest. In a high inter...

  • Q

    If I put Rs 2 lakh in PPF, how much tax rebate I will get?

    A

    As per the existing guidelines and rules a person cannot deposit more than 1.5 lacs in one PPF account. However you can deposit money in the...

  • Q

    I want to buy online term life insuance plan. Which is the best one? Should I go for single premium or regular premium policy?

    A

    Single premium term insurance policies don?t make much sense. Why pay such a large amount at one go when you have the option of paying in sm...

  • Q

    I want to invest some money with at least ten years view. I dont want share market risk. Can I invest in NSC? Is there any other investment option?

    A

    NSC or National Savings Certificate is a safe investment scheme offered by the Central Government. It is an ideal option for investors with ...

  • Q

    Is it a good idea to invest in asset allocation funds? if yes, please suggest some good fund to invest money. I am 35 years old and can invest Rs 10000 per month.

    A

    Asset Allocation Funds are for those investors who want to take an exposure into different asset classes but do not wish to create their own...

  • Q

    My CA says that I have to pay tax on interest accrued on my FD of Rs 20 lakh. I have submitted form 15H in all banks. Is it necessary to pay tax in this case?

    A

    In case of interest on fixed deposits which is taxable under the head ?Income from other Sources? a taxpayer has two choices. Either you can...

  • Q

    Please suggest a good investment option of land in South India. I want to buy a land parcel of around 2 acres.

    A

    If you take a look at the South Indian real estate market, Bangalore has emerged as a clear winner. Due to the strong presence of IT/ITeS an...

  • Q

    I want to invest Rs 20000 per month. I have identified Reliance Small Cap Fund and DSPBR Micro cap fund for investment. I can hold to investments for two years. Is it a good idea to invest in these schemes? How much returns I will be getting?

    A

    If you are an aggressive investor, you can consider investing in either of the 2 funds.DSPBR Micro Cap My suggestion is that if you are inve...

  • Q

    I want to save my money for retirment Please suggest a good insurance policy

    A

    For retirement it is advisable to use multiple investment instruments and not just life insurance policies. If you have 15 years or so for r...

  • Q

    IS IT a Good time to invest in GOLD ?

    A

    Currently the outlook for gold is bearish/negative. However if you are planning for a long-term investment in gold it is ideal to invest the...

  • Q

    I have retired from my job in November. I have got Rs 48 lakh from my employers, by way of epf, gratuity and other benefits. Should i invest in senior citizen scheme of LIC? How about pension plans from LIC?

    A

    1. You can invest Post office Senior Citizen Scheme. 2. You also should invest lumpsome in MIP in post office and get monthly interest. 3. K...

  • Q

    I want to save Rs 1 crore for my retirement when i turn 60. Now I am 42 years old and have fixed deposits worth Rs 18 lakh.What should I do to reach Rs 1 cr mark?

    A

    start investing a minimum 5000 per month in mutual fund and increase 10% to 20% every year....

  • Q

    I want to save on my utility bills and fuel expenses.Please suggest a good credit card for me.

    A

    Yes, you will be able to save on Utility bills and fuel expenses through the cash back schemes offered by some of the credit card companies....

  • Q

    I am 36 years old and work in private company. so how can I manage my retirement planning...

    A

    Start with how much you would need monthly today, inflate the numbers and we can work on a corpus and then work on investing monthly towards...

  • Q

    Suggest couple of equity mutual funds for me. I am keen to invest Rs 25000 per month for next couple of years. I can remain invested for at least five years?

    A

    Asset Allocation Funds are for those investors who want to take an exposure into different asset classes but do not wish to create their own...

  • Q

    I am a senior citizen.I received interest of Rs .1,70,000/- on FD.I have duly filled 15G form.I have NO other source of income.Have I to pay Income tax on this interest or can it be excempted?

    A

    Sir, please note if you are less than 80 years but more than 60 years of age, your total income upto Rs 3,00,000 is exempt from tax, you are...

  • Q

    Please suggest a good money back policy for me. I am 27 years old and want to accumulate Rs 10lakh over 10 years.

    A

    If you are a fan of traditional money back policies, go in for the LIC New Money Back Policy of 20 or 25 years. I would suggest you go in fo...

  • Q

    I want to buy a life insurance for my brother Please suggest a good policy. He is 19 years old. he should get Rs 5 lakh when he turns 25 years.

    A

    Best to go in for a ULIP in case he is looking to grow the money also. Go in for a ULIP like HDFC Click 2 Invest which is very low on charge...

  • Q

    In 2013, I bought an Endowment policy from LIC. Premium for that is around 35K per year. Now i understand, this was a big mistake and i want to go for a term insurance policy. I have already paid two premiums in 2013 and 2014 and I want to make this policy paid-up. Can i pay one more premium this year and make that endowment policy paid-up ? Or is there any better alternative ? Please suggest.

    A

    Yes, you can convert to a paid-up policy after 3 years premiums have been paid. I would recommend that you surrender the plan and take back ...

  • Q

    Is zero depreciation cover a good option under auto insurance? I have plans to buy honda city in January

    A

    Zero depreciation is a good option to along with the standard car insurance plan. By paying a slightly increased premium you can ensure that...

Explore Moneycontrol

Copyright © e-Eighteen.com Ltd. All rights reserved. Reproduction of news articles, photos, videos or any other content in whole or in part in any form or medium without express written permission of moneycontrol.com is prohibited.