Saving Tax through Hindu Undivided Family (HUF)
What is an HUF? If you are a Hindu, Jain, Sikh or Buddhist, you can have an HUF as a separate tax entity and have tax benefits under wealth tax and income tax. The concept of HUF is based on the joint family system. This family comprises of male members that are blood relatives, female members who are either married, mothers, unmarried daughters or widows etc along with the children and grandchildren, sometimes extending to five generations, putting up under the same roof.
This arrangement of HUF highlights that there is a separate entity called "Family" that has its source of income, its set of liabilities and assets and fall under the taxation slab. Formation of HUF gives you an opportunity to save tax and gain tax benefits under Income Tax and Wealth Tax.
Few years back individuals used to have multiple Pan Cards in order to gain tax rebates by showing that they are different persons. It goes without saying that this is an illegal practice and punishable offense and thousands of individuals may be doing so even now. However, the right way for them could be forming an HUF and applying for a Pan Card in name of the HUF.
Account of HUF - The manager of the HUF is generally the senior most person of the family who is referred to as 'Karta'. The family members under HUF share business, properties, wealth, income and also hold common accounts which are managed by the 'Karta'. This means that 'Karta' becomes the authorized signatory of these accounts.
The common corpus gets created when all family members pool in their incomes in the accounts. This is managed by the 'Karta' and the division of corpus can be made on the basis of agreement between every coparcener of the family. Tax benefits can also be availed under various sections and heads by formation of an HUF.
Documentation - Following is the list of documents that are generally required in order to open an HUF account. The documentation may, however, differ from bank to bank or from one financial institution to the other.
- Identity Proof of Karta
- Address Proof of Karta
- Pan Card of Karta
- Pan Card of HUF
- A declaration is also provided by each member of the family where they declare the name of Karta and also state that -
i) Karta has the authority of the accounts vested in his hand
ii) That the members are the only members of the HUF
iii) The Karta holds the right to govern all the transactions of the HUF accounts on behalf of the members.
Tax Benefits to Hindu Undivided Family (HUF) - If you wish to avail benefits and save taxes you can achieve this through Hindu Undivided Family account. The following are the benefits that can accrue to you through HUF.
- Gifts that you receive up to Rs 50K are exempt from tax under an HUF. One can avail tax benefits for higher amounts in a way that the father who owns an HUF can give property or higher amount of money as gift to his son who owns a small HUF and can avail exemptions under Section 64(2) and Section 56(2) but that has to be in the name of HUF and not an individual.
As HUF is treated as a separate entity, the following exemptions are also applicable -
- Section 80 D - This section becomes applicable when HUF is paying a medical premium on behalf of its members. Deduction up to Rs 15,000 can be claimed under this head and deduction up to Rs 20,000 can be claimed if the member is a senior citizen.
- Section 80 DD - This section enables the HUF to claim a deduction of up to Rs 50,000 under the head of medical expenses incurred, expenses incurred for training, maintenance and rehabilitation of a disabled member of the HUF.
- Section 80 C - Apart from the standard deduction, the deduction under Section 80 C is also applicable to HUF. This section enables HUF to invest the income earned from sources like business, property, salary or through business in any of the Section 80 C permissible investments like PPF, NSC, LIC premiums, ELSS etc.
- Wealth Tax - An exemption of up to Rs 30 Lac can also be claimed under wealth tax by HUF.
- Capital Gains on House Property - According to the standard rule if an HUF sells some property and gets capital gains then it would be in a position to save on the capital gains by reinvesting the money into some other property within 2 years of such sale or by investing the proceeds in order to construct a new property within 3 years of such sale. The capital gains can also be reinvested in REC or NHAI bonds for a lock in period of three years but the interest earned through this investment is taxable for HUF.
Things to Know about HUF
- Any HUF can receive gifts from a bigger HUF and can also receive gifts from members of the HUF as assets. If a stranger gives any gift to the HUF then that should not be exceeding Rs 50,000.
- The Karta of the family is entitled to receive remuneration from HUF in order to carry forth the expenditure and in interest of the family.
- One needs to be married for creating an HUF. Having children for this purpose is not mandatory.
- Daughters are entitled to be a Coparcener even after their wedding. Daughters also enjoy the right of being co-parancers in two HUFs.
Contributed By: Megha Sharma |
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Megha Sharma works as a guest lecturer in Delhi. She holds an MBA & Doctorate from the UPTU. With extensive knowledge and experience in various financial products, she also works as a consultant in banking & finance domains wherein she offers advice to her clients in managing personal finance. | |
How it will be tax free or will there be any declaration to be made for exemption of income Tax Or if we have to follow some rule for exception.
As per the 2012 amendment effective from 1st October, 2009 in case of an HUF, only member of the HUF shall be treated as a relative!
I know that the gift is liable to gift tax u/s 56(2)(vi), but if the gift is void then is it liable to gift tax??