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Tax Planning through HUF

HUF Planning

Basics, Formation formalities, Benefits, Closure

The Hindu Undivided Family has its roots in the ancient Hindu law like the Manu Smriti. Hindu Undivided Family (HUF)—a legal entity embedded in tax, corporate governance and state codification of Hindu personal law in India. A Hindu Undivided Family (“HUF”) is a special feature of Hindu society, which today consists of a common ancestor and all of that common ancestor’s lineal descendants together with their spouses and unmarried children. Prior to the amendments to the Hindu Succession Act, 1956 in 2005, only sons could be coparceners, but since then a HUF includes all family members who are Hindus by religion, i.e. sons and daughters whether married or unmarried. The Karta is the manager of the family. Traditionally, the Karta was usually the most senior male. In light of the legal changes enacted in 2005, females can now not only be co-parceners but also Karta. The Karta has the power to transfer for value the joint family property thus binding on all of the coparceners in the property if such transfer is made for legal necessity or for the benefit of the family (i.e. payment of debts for family business). How does a HUF come into existence?

The concept of Joint Family under Hindu law as well as the HUF in Income Tax Act, 1961 is broadly the same. HUF is purely a creature of law and cannot be created by an act of parties. A HUF is a fluctuating body, its size increases with birth of a member in the family and decreases on death of a member of the family. The most frequently asked question about HUF is: How does it come into being? To form an HUF, all you have to do is Get Married. The HUF gets created as soon as you complete the seven (or four, whatever) circles round the holy fire and become Man and Wife. There have to be a minimum of two people to constitute a family. The husband and wife together make up a family. They don't have to wait till they have a baby to constitute their HUF. Every Hindu becomes a member (Coparcener) of an HUF the moment he/she ejects out of her mother's womb, mode of delivery--C-section or Normal--notwithstanding. A HUF consists of Karta, all the sons and daughters are referred to as Coparceners and wife is a member.

How to blow funds into the HUF?

Till the time the HUF has an empty kitty, it is like a balloon that no one has yet blown air into. A balloon can rightfully be called a "ball"oon only when it swells up with air inside it. Without the air the balloon is inert, dormant. An HUF too is inert and dormant without funds.

"The million-dollar question indeed is: How to blow funds into the HUF and turn it into a balloon that floats?

Strangers can make gifts but only up to Rs 50,000 (Section 56). A way-out is to receive gifts from members of bigger HUFs, who, though your relatives, aren't members of your smaller HUF.

HUF's are allowed to open Savings account although it`s a non-Individual entity.

A member of the HUF throwing his money into the common pool, or to use that overused cliché' the family hotchpotch, is out of the question, thanks to Section 64(2) which would tax the income earned by the HUF on that money in the individual member's hands only.

But the clubbing provisions can be bypassed if the HUF invests the money in instruments yielding tax-free income. The tax-free income can then be reinvested to earn even taxable income--income on income is out of the clubbing provisions.

After the HUF has a nucleus of its own and gets going, care has to be taken to keep the HUF's affairs completely distinct from the individual members' affairs. Where the members of the HUF carry on their individual businesses, as they normally do, the distinction between what constitutes the individual's income and what is HUF's income may get blurred.

HUF funds and the affairs of the HUF are completely differs from one’s own affairs. One can do his/her business/job freely while having the member of HUF. But HUF income and individual income are different and to be taxed differently.

So to have capital in HUF account we should take following steps.

1. Have a HUF Formation Deed. (Banks in India have their own format for this)

2. Have a Gift Deed for receiving funds-Inheritance, Gifts from “Relatives” other than members of this HUF.

3. Apply for permanent account number (PAN)

4. We should have opened a bank account first (not must) but it is advisable so that we can have transaction by cheques.

Formation of capital of HUF, Transfer money by gifts etc. to HUF capital keeping in view the clubbing provisions and tax on gifts under Income tax act, Remember there is no Tax on gifts in kind though they may attract clubbing provisions in some cases.

Property of a Joint Family

The joint family property consists of: Ancestral property; Separate property of coparceners thrown into common stock; Property acquired with the aid of ancestral property.

Income Tax & HUF

A HUF is treated as a taxpayer separate from the family or the Karta and is eligible for its own tax exemption, separate from the Karta’s individual income tax exemption for Indian income tax purposes. The income exempt ion for individual taxpayers is Rs.2, 5O, OOO per year, and Rs 3, 0O, OOO for senior taxpayers (between age 60-80) or Rs.5, 00,000/- (Super Senior Citizens (Age above 80). In addition, the HUFs, being a separate entity for tax purposes, can claim a basic exemption of Rs.2, 5O, OOO.

In case the HUF gives its property on rent to any person, then from the rental income, the HUF will get deduction in respect of entire interest on loan paid by it in respect of the said house property besides statutory deduction of 30% of rental income. Income Stream of HUF:

ü House Property Income

ü Capital Gains-Shares, Property etc.

ü Income from Business (not Profession)

ü Income from Other Sources- Interest, Other Sources.

Exemptions available to HUF:

80C: Up to Rs.1, 50,000/-. HUF can take out Life Insurance Policies in the name of its members and make payment of the premium, HUF can contribute to the PPF account of its members, invest in 5 Year Bank Fixed Deposits. PPF of HUF is not allowed now but old account continues.

80D: Up to Rs.15-,000/-Rs.20,000/-. payment of Health Insurance Premium for its members (Rs.15000/-) & if the HUF takes out Mediclaim Policy etc., for members of the family who are senior citizens then the amount of Rs. 15,000 will be enhanced to Rs. 20,000. Out of this amount up to Rs. 5,000 can also be included for Preventive Health Check UP.

80DD: Up to Rs.40-,000/-Rs.60,000/-.HUF actually makes payment on medical treatment of a specific disease or ailments as mentioned in the Income-tax Act for the benefit of its members & if such expenditure is made for a member who happens to be a senior citizen, then the deduction to be allowed will be Rs. 60,000.

80G: Donations. Donate to recognised charity trusts and institutions subject to limits of 10% of Gross Total Income. Deduction varies from 50% to 100%.

The HUF as per section 24 of the Income-tax Act is also entitled to claim deduction for interest on self-occupied house property of Rs. 1,50,000 in a year.

The income of the HUF from dividend or shares or Mutual Funds is fully exempt from income-tax.

NRI & HUF

A HUF, whose management, superintendence and control are exercised wholly from within India during the financial year, would be a Resident. Income earned by HUF is regarded as HUF income and taxed in India as a separate entity distinct from it`s members and Karta.


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