FORM HUF, SAVE TAX!!!

HOW TO SAVE TAX BY FORMING HUF??

An HUF is a separate  entity for taxation under the provisions of Income Tax Act, 1961. There is no doubt about the usefulness of the HUF as a tax planning tool which is entitled to the same exemptions as any other individual taxpayer and enjoys the same deductions that an individual enjoys.

 

What is HUF?

HUF means Hindu Undivided Family and as the name suggests, HUF is a family of Hindus. However, even Buddhists, Sikhs and Jains are regarded as Hindus and they can also form HUF. The income of HUF can be assessed in the hands of HUF alone and not in the hands of any of its members. The senior most male member of the family who manages the affairs of HUF is known as KARTA.

How to create an HUF?

  1. To create HUF, you need to apply for PAN card. HUF has a separate PAN card and Karta must apply for it.
  2. Open a HUF bank account.
  3. Execute a deed to a stamp paper to transfer the assets to HUF- this can be property, cash, jewellery etc.

Benefits of forming HUF

If you are paying too much tax and all possible deductions have been availed of, the only way to bring down the tax liability is by starting an Hindu Undivided Family (HUF). However, you can do so only after you get married.

  1. HUF is a separate entity in itself and qualifies for all tax benefits under Section 80C (up to Rs 1.5 lakh), 80D (health insurance premium), 80G (donation), 80L (income from bank account) of chapter VI of Income Tax Act,1961.
  2. HUF also enjoys exemption under section 54 and 54F in respect of capital gains.
  3. Under wealth tax act HUF is treated as distinct entity and enjoys separate taxability.
  4. Tax slabs applicable to income of an HUF is similar to that of any individual taxpayer, with the basic exemption of Rs 2.5 lakh.
  5. If you have ancestral property and earning some income from this property then it is better to transfer such property to HUF and save tax upto exemption limit applicable to individual.

Let us look at a more detailed example to see how a HUF can save one’s taxes.

An HUF can be used for any purpose apart from receiving salaries, which means that one can form an HUF to keep ancestral property, or to run a business.

For example, if a married man has a salary of Rs 10 lakh, and gets rent on ancestral property of Rs 6 lakh, as an individual he will be paying taxes of approximately Rs 2.57 lakh (assuming Rs 1 lakh is invested under section 80C).

However, if he shifts the property to an HUF, then he will be paying only Rs 72100 as taxes as an individual and Rs.10300 as taxes as an HUF (assuming that both the individual and the HUF has invested Rs 1 lakh under section 80C). This results in a tax saving of around Rs 1.75 lakhs.

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