Here is how Hindu Undivided Family will help you save taxes

Personal finance expert, Pankaj Mathpal of Optima Money Managers said that Hindu Undivided Family is a creation of law so it cannot be created by an agreement between two parties.

"Any individual when he gets married and he belongs to Hindu, Sikh, Jain or Buddhist family he can open his account with his wife and any asset received in that by gift or by will or created in future will be assessed separately," he said in an interview to CNBC-TV18. 

Below is the verbatim transcript

Q: Which are the ways in which the institution of a Hindu Undivided Family (HUF) can be used by families to save on taxes?

A: Hindu Undivided Family is a creation of law so it cannot be created by an agreement between two parties. Every individual who is born Hindu, Sikh, Jain or Buddhist to whom Hindu Personal Laws are applicable can create a HUF.

I said create HUF means it is creating HUF assets and opening account in the name of HUF. Therefore, the membership comes by status. Any individual when he gets married and he belongs to Hindu, Sikh, Jain or Buddhist family he can open his account with his wife and any asset received in that by gift or by will or created in future will be assessed separately. Therefore, one is dividing the income.

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I will give you one example. Suppose an individual has income of Rs 10 lakh already and now he wants to start a business. So, in a small business if he earns Rs 5 lakh and now because his income has exceeded Rs 10 lakh he will pay 30 percent tax on the amount exceeding Rs 10 lakh that means, Rs 150,000. Suppose he does business in the name of that HUF. That is a separate entity. He can claim deduction under Section 80C, 80CCC etc. and also he will get benefit of standard deduction. So, on the additional income of Rs 5 lakh, which is now coming in the HUF, suppose if he invests Rs 1 lakh, the income comes to Rs 4 lakh. As one knows for FY12-13, Rs 2 lakh is the basic exemption limit. However, it is only Rs 2 lakh remaining on which he has to pay tax and that is also because it is below Rs 5 lakh and as per slab rate he will pay only 10 percent on that.

Therefore, on the income of Rs 5 lakh after claiming deduction, after exemption he is paying only Rs 20,000 tax against Rs 150,000 that he was supposed to pay earlier. So, basically when we divide our income, it is to manage taxes. Therefore, to plan taxes HUF is a good idea.

Q: Can the incomes earned under HUF be spent by the person who has created the HUF? There is no problem in terms of inheritance or any other issues with the assets under the HUF?

A: Whatever assets have been created in the name of HUF are HUF assets. HUFs will have their own assets, liabilities, income, expenses. So, if the business is being done in the name of HUF there will be employees of HUF who are working for that. however, their salaries, expenses or the office, which is also used for doing that business or rent for office, all the expenses will be deducted from HUF income only. Therefore, separate income, separate expenses and if salary is being paid by HUF to the Karta or other members that can also be deducted from the HUF income.