There are many people who are not aware about the concept of Hindu Undivided Family (HUF) and the merits it provides in investments and tax savings. This article will simplify most things related to HUF and will thereby help you to do better tax planning. However please take final advice of your tax adviser with respect to this. This article deals with following topic in very simple summary:
- What is HUF
- Formation of HUF
- Karta and other Members
- Initial Contribution for HUF
- Methods of Generating Funds in HUF
- Tax Benefits from HUF
What is HUF?
An HUF, or a Hindu Undivided Family, is a separate tax entity in addition to individual persons who are members of such a family. This entity can be created by any married person who is Hindu, Buddhist, Jain or Sikh and thereby the tax entity can claim all tax benefits under Income Tax.
As HUF is a separate tax entity, it has its own PAN Card.
Formation of HUF
- HUF can be created immediately upon marriage with a few documents like HUF Deed that states the name of the Karta (usually head of family) and its members.
- Based on this, one needs to apply for the HUF PAN card (Link Here: https://www.tin-nsdl.com)
- Once the HUF PAN card is generated, a bank account of the same can be opened.
- Please note that HUF Pan Card does not have any photo on it. One more notable point is that the 5th letter of the HUF Pan Card is always a letter “H”
- For executing any documents related to HUF, the Karta needs to sign along with the rubber stamp.
HUF Owners –Karta and Other Members
- All the members in your family including your wife, children, their wives and their children are the members of HUF.
- The male members and unmarried daughters are called coparceners.
- The only difference between coparceners and members is that a coparcener can demand partition of HUF.
- Assets in the name of HUF are assets of the family and not of any single individual. All members of the HUF have the right on those assets. Thus, one must think before transferring any asset in the name of HUF.
Initial Contribution and capital for HUF
- Gift: HUF can receive gifts of any amounts from relatives without having any tax implications for the giver or the taker.
- Inheritance: HUF can receive cash, property, shares or any other assets through inheritance. For this, a will or deed needs to be prepared in the name of an HUF instead of inheriting to individuals of the family.
Methods of Generating Funds in HUF: Any income that arise on investment of HUF funds or on the utilization of HUF assets would be regarded as HUF income. Typically, this can be done in the following ways:
- Business Income: Business income can be generated in the name of HUF by making HUF the owner of firm. Most people who are regular financial market traders do the trading through HUF thereby creating business income in HUF.
- Capital Gains or Interest Income: Gains from Investments in shares can also help to generate income in HUF. In case, the HUF entity does not have any other income then gains from shares are also allowed for basic income tax deduction of 2.5 lakhs.
- House property income: HUF can have a property in its name. Any rental income from such property is considered as income of an HUF under House Property.
Benefits of tax planning under HUF
- HUF is a separate entity for taxation under the provision of income tax act, which can have its own income. This indicates that person may be assessed in two different capacities as an individual and as a Karta of HUF. One can lower his tax liability by setting up a separate entity HUF.
- HUF enjoys the same tax benefit as an individual from the income tax slab. Basically this means no tax up to Rs. 2.5 lacs.
- HUF enjoys tax deductions under section 80c of Income Tax up to Rs. 1.5 lacs for the investments made in PPF / Tax saving schemes. There are also deductions available for medical insurance and other such standard deductions available to any other individual.
- Note: PPF accounts cannot be opened in the name of HUF from 2006. However, an HUF can contribute for PPF of its members and claim deduction
- HUF can also give gifts to its members and the same is tax-free income in the hands of the members.
Conclusion: Use of HUF is the legal way to save taxes especially to high income earners. A penny saved is penny earned.