If you are married and are a Hindu, Sikh, Buddhist or Jain by religion then you can have an HUF as a separate tax entity. This is a boon for those who want an easy and safe method to save tax. In this article we will discuss what an HUF is, how to create capital for HUF and how it can save total tax that your family pays.
What is HUF ?
Full form of HUF is hundu undivided family and it comes into being automatically when a Hindu, Sikh, Buddhist or Jain male gets married. One doesn’t even need to wait for childrens to be born. An HUF consists of The Katra(oldest male) and Coparceners which include his wife, daughter(s), son(s), grandsons, great-grandsons and wives of sons and grandsons. After the death of karta, his eldest son becomes the next karta, and after him the next son in line.
As such, no formal action is required to form an HUF. However, if you want to use HUF to save tax then you need to create a capital for your HUF and that requires taking some formal steps.
How to Create HUF Formally and Create Capital for it?
There are several steps involved in this process.
- First you should apply for a PAN number in the name of HUF. For this, the Karta should write his name as ” KARTA NAME HUF”. For example if Name of Karta is Shanker, he will write his name as Shanker HUF.
- Go to Notary and sign a HUF Capital Creation deed. Most of the advocates sitting in Notary will have the format for it. Basically this deed declares the source of funds that have been generated for HUF and also the members that constitute this HUF.
- Once you have a PAN card and HUF Deed, the you can easily go to any bank and open a HUF bank account.
- While declaring the source of funds and when accepting gifts, keep in mind the clubbing provisions (Section 64(2)) and tax on gifts (Section 56(2)) under Income tax act. Section 64(2) says that if karta or any other member of HUF transfers his money to the HUF, then the income earned over that money by the HUF will be taxed on the individual who has transferred that money. Section 56(2) says that gifts given by stranger to HUF are free of tax only uptil rupees 50,000. However, the Gifts received from relatives of members of the HUF are exepmt from this section.
- If you have an ancestrial property and there is an income generated from it, then this property would be property of the HUF and the income generated on this property will be classified as HUF income. If such property is sold, then the money received can be transferred to the HUF.
- You can receive any amount in gift from your Father or Gradfather into the your HUF account. As Father is not a member of your smaller HUF and he is not a stranger, so such gifts keep Section 56(2) at bay. Such gifts are totally tax free.
- You(karta) and members of family can transfer funds received on their birthdays, marriage etc to the HUF.
- You and other members of HUF can transfer their money to HUF but inorder to save from Section 64(2), let HUF invest this money into a taxfree instrument so that the interest earned is tax free and is therefore non-taxable. After maturity of this instrument, HUF can invest the money in any way it likes.
Important HUF Facts:
- Daughters can be a Katra of a HUF. An unmarried daughter, in the unfortunate event of her father passing away, will become the Karta of the HUF if she has no brother.
- Daughter continue to be a Coparcener of HUF of her father after her marriage. She also will be a member of HUF of her husband.
- Daughters and all other members of HUF have a right over their share of HUF property.
- HUF can pay remuneration to the KARTA of the family.
- The Karta can enter into partnership with a firm on behalf of the HUF. But the HUF itself can not be a partner in a firm.
- There can be a all female HUF. Where a couple has only one issue—-a daughter—-and the husband passes away,the mother-daughter duo can continue the HUF.
Benefits of HUF / How to Save Tax with HUF
The main benifit of creating HUF is that it creates a separate tax entity that is eligible for all those exemptions that are available to a resident Indian Male. It can own property, have its own business and claim all tax benefits under Wealth Tax and Income Tax. Below are some of the ways to save tax with HUF:-
- Assign ancestral properties and wealth to HUF and invest it. This was the income and capital gains will be taxed in hands of HUF as separate taxable entity and hence will save total tax liability of family.
- Save tax by getting gifts in the name of HUF rather than on your own name.
- If you have a big family and your sons are married, they can create their own HUFs in addition to your HUF. Your HUF will continue even after your death. So, your family will have several Separate Taxable Units thereby saving additional tax.
- Movable or immovable property received by a HUF through a Will or by inheritance is exempt from tax.
- If HUF property is sold and there is a capital gain, the HUF can reinvest this amount into another property within 2 years, or construct a property within 3 years and save tax on these gains. HUF can also invest the gains into REC or NHAI bonds with 3 year lockin period and save tax.
- Income generated by HUF in a year is entitled to a basic exemption just like a Resident Indian (male). (Currently its Rs. 1,80,000,) All the tax slabs are also the same as those for a resident Indian (male).
- Huf can save additional tax by investing in instruments covered under section 80C with the exception of PPF. So, HUF can invest in ELSS, LifeInsurance, NSC and so on.
- HUF can also invest in Infrastructure bonds and health insurance of members of HUF to save additional tax.
- HUF gets exemption of INR 30 lakhs from wealth tax.
Disadvantages of Creating Capital for HUF
- HUF is looked with high degree of scepticism by the Income Tax Department and so you need to be very careful with the transactions in HUF account.
- Once some asset or money is assigned to an HUF, then it becomes property of that HUF and you cannot withdraw money or property from HUF instantly for personal use. HUF can however be partitioned among all co-parceners of HUF with consent of all of them.
- Once transferred to HUF, the assets become a property of HUF and you no longer have any individual right on it. For example, if you have a son and a daughter and then you buy a home on HUF name; then both of your children will have an equal right on your home. Later, you will have no right to write a WILL to give that house to your son after your death.
Should you go for an HUF?
This depends on how big your family is, how much you and your family earns and whether or not you have an ancestral property/assets that can be used to create capital for your HUF. Also keep the limitations of opening HUF in mind.