How to save taxes by forming a HUF?

Last Updated at: January 03, 2020
1258

Income Tax Act, 1961 provides legal opportunities to save Income tax. So, it is always better to take benefits of such provisions. HUF is an entity, which has been given some assured exemptions, quite similar to an Individual by the IT Act. If one is born as a Hindu or a Sikh or a Buddhist or a Jain, they can avail the benefit of these provisions, and if possible one should take it.

What is a HUF?

A HUF (Hindu Undivided Family) consists of all the males lineally descended from a common ancestor, their wives, daughters, and daughters-in-law. HUF can also be formed by the Brahmo Samajist, Virashaiva, Arya Samajist Lingayat, Prarthna Samajist, Jains, Buddhist and Sikhs families.

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Who can be members of a HUF?

All the members of the family are considered as HUF members. Male members are known as coparceners, the females are known as members. The senior-most male member of the family is called the Karta (manager), and a typical HUF consists of a Karta, his sons, grandsons, and great-grandsons (all of whom are coparceners), and their wives and unmarried daughters (all of whom are members).

Income Tax Benefits in forming a HUF

To get a clear idea on the income tax benefits that are available by forming a HUF, let us take an instance of a family, which is now common, the nuclear family.

Gautham is married to Sanjana and has two minor children, Meghna (daughter) and Karthik (son). Gautham’s annual income is Rs. 10,00,000 and Sanjan’s is Rs. 10,00,000. Gautham has inherited an ancestral property, an apartment, which is on rent (annually Rs. 3,00,000).

If Gautham 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 Gautham will have is the rent income of Rs. 3,00,000 which was previously assessed as a part of his income and now be carved out and shown as the HUF income and the HUF will be assessed separately as another entity and will have the benefit of the exemptions of Income Tax Act similar to those received by Gautham.

This will lead to a considerable reduction of the Income-tax being previously paid by Gautham and the HUF will pay a much smaller amount of Income tax on this income of Rs. 3,00,000/- after enjoying the exemptions that are available. Also, the gifts received by the coparceners and member (beyond the exemption limit) can be shown as received by the HUF, thereby reducing the income tax burden of both Gautham and Sanjana.

Now, one may invest the HUF income in the form of LIC policies, PPF accounts, ELSS instruments in the name of Karta, coparceners or member of the HUF and it will lead to the income tax deductions.

Formation of a HUF

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

2)   The rubber stamp should be rectangular and carry the name of the HUF and that of the Karta

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

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

Who should actually form a HUF?

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

So, in this way, one can form a HUF and avail the benefits.

 

How to save taxes by forming a HUF?

1258

Income Tax Act, 1961 provides legal opportunities to save Income tax. So, it is always better to take benefits of such provisions. HUF is an entity, which has been given some assured exemptions, quite similar to an Individual by the IT Act. If one is born as a Hindu or a Sikh or a Buddhist or a Jain, they can avail the benefit of these provisions, and if possible one should take it.

What is a HUF?

A HUF (Hindu Undivided Family) consists of all the males lineally descended from a common ancestor, their wives, daughters, and daughters-in-law. HUF can also be formed by the Brahmo Samajist, Virashaiva, Arya Samajist Lingayat, Prarthna Samajist, Jains, Buddhist and Sikhs families.

Ask a Free Legal advice

Who can be members of a HUF?

All the members of the family are considered as HUF members. Male members are known as coparceners, the females are known as members. The senior-most male member of the family is called the Karta (manager), and a typical HUF consists of a Karta, his sons, grandsons, and great-grandsons (all of whom are coparceners), and their wives and unmarried daughters (all of whom are members).

Income Tax Benefits in forming a HUF

To get a clear idea on the income tax benefits that are available by forming a HUF, let us take an instance of a family, which is now common, the nuclear family.

Gautham is married to Sanjana and has two minor children, Meghna (daughter) and Karthik (son). Gautham’s annual income is Rs. 10,00,000 and Sanjan’s is Rs. 10,00,000. Gautham has inherited an ancestral property, an apartment, which is on rent (annually Rs. 3,00,000).

If Gautham 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 Gautham will have is the rent income of Rs. 3,00,000 which was previously assessed as a part of his income and now be carved out and shown as the HUF income and the HUF will be assessed separately as another entity and will have the benefit of the exemptions of Income Tax Act similar to those received by Gautham.

This will lead to a considerable reduction of the Income-tax being previously paid by Gautham and the HUF will pay a much smaller amount of Income tax on this income of Rs. 3,00,000/- after enjoying the exemptions that are available. Also, the gifts received by the coparceners and member (beyond the exemption limit) can be shown as received by the HUF, thereby reducing the income tax burden of both Gautham and Sanjana.

Now, one may invest the HUF income in the form of LIC policies, PPF accounts, ELSS instruments in the name of Karta, coparceners or member of the HUF and it will lead to the income tax deductions.

Formation of a HUF

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

2)   The rubber stamp should be rectangular and carry the name of the HUF and that of the Karta

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

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

Who should actually form a HUF?

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

So, in this way, one can form a HUF and avail the benefits.

 

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