HUF may be composed of
- Large Families;
- Small Families; or
- Nuclear Joint Families
Please Note: Jain & Sikh families are not governed by Hindu Law. However, for the purpose of Income Tax Act, such families are treated as ‘Hindu Undivided Families’. Talk to the best tax lawyers in India to know more.
The Karta is the oldest male family member. In the event of the death of the karta, his eldest son becomes the next karta, who will be followed by the next son in line if the eldest son does not want to be the karta. If there are no sons, the unmarried daughter can become the karta in the unfortunate event of the death of her father. If the karta passes away, the assessing income tax officer should be intimated of his death and the appointment of the new karta.
All the male members are called coparceners. This includes the sons, grandsons and great-grandsons of the karta, who holds the joint family property. These coparceners acquire an interest in the family property, by virtue of their birth. A coparcener has the right to demand that the family property gets divided, so that they can receive their share in the property, or in whatever assets the HUF holds. Following are the allowed coparceners:
- Holder of the property
- Sons and daughters
- A daughter continues to be a coparcener even after her marriage, regardless of whether she is a member in her husband's HUF.
How does a HUF help you to save tax
This is the most important aspect! A HUF is a legitimate tax saving vehicle. It is a separate entity and enjoys the same tax exemptions and tax slabs as a resident individual. Only income arising on the use of HUF funds (e.g. interest earned on loans given by HUF) or property (rental income of HUF property) will be considered as HUF income.
Different ways to save tax
- Married couples can benefit most from the HUF. They can take health and life insurance policies for themselves, in the HUF’s name and invest to get maximum benefit upto Rs.150,000/-.
- A family business can also be operated from the HUF account and the income received from the same will be taxed in the name of the HUF.
- If either the husband or wife happen to be holding an ancestral property which accrues rental income, they can transfer this income to the HUF account and it will be taxed as the income of HUF. For example, a person earning a salary of Rs.700,000/- p.a. and receiving Rs.600,000/- p.a. as rental income from their ancestral house, and if he transfers the rental income amount to the HUF account, instead of adding it to his income, he will have to pay only Rs.115,000 as the tax. But if he clubs the rental income to his salary, he would have to pay Rs.215,000/-.
- Another advantage of creating an HUF of that gifts of upto Rs. 50,000/- p.a. are exempt. However, HUF can also receive gifts worth Rs. 2.5 Lakhs under basic exemptions and Rs. 1.5 Lakhs as the maximum deduction
- HUF is also a very great tool for Tax planning and Insurance planning. Any policy can be taken in the name of any member of HUF or Karta and HUF can pay the premium and get benefit u/s 80C. For Ex . If a person takes an Insurance policy and paying a premium of Rs. 3 lacs. He can take two separate policies and pay a premium, one as an individual and one from the HUF account. He will get the entire 3 lacs deduction u/s 80C i.e. 1.5 lacs as an Individual and 1.5 lacs in the HUF account.
Deductions and exemptions available to HUF
HUF is entitled to a basic exemption of Rs.2, 50,000 just like a resident Indian male. Where the taxable income exceeds Rs. 2,50,000 but does not exceed Rs. 5,00,000, 10% of the amount by which the taxable income exceeds Rs. 2,50,000.
Where the taxable income exceeds Rs. 5, 00,000 but does not exceed Rs. 10, 00,000, Rs. 25,000 + 20% of the amount by which the taxable income exceeds Rs. 5,00,000.
Where the taxable income exceeds Rs. 10, 00,000 , Rs. 125,000 + 30% of the amount by which the taxable income exceeds Rs. 10, 00,000.
Apart from a basic exemption of Rs. 2, 50,000, a HUF is eligible to all those exemptions which are available to a male resident.
Forming Hindu Un-Divided Family
According to Hindu law (both Mitakshara and Dayabhaga schools), an HUF is headed by a Karta who should be the eldest male member of the family. But a 2016 Delhi High Court order has finally given women, namely, the eldest female member the right to be karta of an HUF. Consult with top taxation advocates in India to know more.
Since the HUF is being formed for tax purposes, you can start one by making an HUF deed, applying for an HUF PAN card and opening a HUF bank account. Custom dictates that marriage by itself is enough evidence of the existence of an HUF but financial institutions increasingly insist on a formal deed spelling out the names of the karta and co-parceners in the joint family.
A co-parcener is that member of the joint family who is entitled to a right in the family assets/ property and demand partition of shares from the karta. Note that if a partition is challenged and goes to the court, the justice system usually settles matters by equally distributing rights to all parties concerned. The following points should be noted with regard to the formation of HUFs
- An individual cannot form HUF , it should be formed by a family.
- An HUF is simultaneously created at the time of an individual’s marriage.
- To form HUF, you must have the same ancestor including the lineal descendants including their daughters and wives.
- Other than Hindus, Buddhists and Jains can also form HUF.
- HUF mainly comprises of the assets that are acquired as a gift , a property acquired by selling a or buying a joint family property, an ancestral property, a will or a common pool by the members of the HUF.
- When you make an HUF, you should get a formal registered name , you must make a legal which would have the names of the HUF members and the business. After this process, a PAN no will be issued, and a Bank Account will be opened.
By making an HUF you can certainly save yourself from shelling out a lot of money as income tax. A person should also keep in mind that, if he takes a house in his name, and if he transfers the rental income to the HUF, to claim tax benefit, he will not get it. It will be clubbed with his income and taxed accordingly. However, the rental income once transferred to the HUF account, can then be invested in tax free instruments through the HUF account. This can be used as a tax saving method.
Having said the above, one should be very careful and plan their transactions properly to the HUF account. If you are not sure or not familiar of how to go about, it is advisable to take advice from a good tax lawyer in India .
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