Save Taxes by Creating HUF

A Hindu male with his wife and children automatically constitutes the HUF. The HUF is a creature of Hindu Law.  HUF is defined as consisting of a common ancestor and all his lineal male descendants together with their wives and unmarried daughters. Therefore a Hindu Undivided Family consists of males and females. Daughters born in the family are its members till their marriage and women married into the family are equally members of the undivided family. HUF under Income Tax Act and Tax Benefit HUF is a separate entity for taxation under the provisions of the Income Tax Act, 1961. This is in addition to an individual as a separate taxable entity it means that the same person can be assessed in two different capacities that is as an individual and as Karta of his HUF. The question of HUF status for a Hindu buyer or seller of any property assumes importance because of certain tax advantages attached with HUF under the income tax and wealth tax laws. Thus, if an individual has personal income and has also HUF income, he would be entitled to have an exemption of Rs 180,000 for his individual income and another Rs 180,000 for his HUF income. Besides, he would also be eligible to a further income tax deduction or exemption of Rs 100,000 under Section 80C in respect of LIC premium, PPF contribution, NSC, etc., both on individual and HUF income separately. Thus, where the taxable individual wealth is eligible to a general exemption of Rs 180,000, the HUF’s taxable wealth is also eligible to a further general exemption of Rs 180,000. Hence, persons having immovable property and jewellery and motorcars under HUF status stand to gain from the extra exemption under Wealth Tax Act as well. Things to do to create HUF and to reduce the tax incidence (i)           A member of the HUF is prevented from throwing his money into the common pool due to the provisions of clubbing provisions, as the income earned by the HUF on that money will be taxed in the individual member’s hands only.  However, if the HUF invests the money in instruments yielding tax-free income. The tax-free income can then be reinvested to earn even taxable income–income on income is out of the clubbing provisions; (ii)          HUF can receive tax free gifts up to Rs 50000; (iii)        Further, a father may make a gift of money to his son’s newly-created HUF, clearly specifying in the Gift Deed that the gift is to his son’s HUF and not to the son himself. This will not attract both gift tax provisions and clubbing provisions; (iv)        Increase the number of HUFs through the device of partition of the HUF; (v)         Create separate taxable units of HUF by WILL in favour of HUF or gift to HUF; (vi)       Through family settlement / arrangement; (vii)     Payment of remuneration to the Karta and other members of the HUF; and (viii)    Loan from HUF to the members of the HUF. Other things to keep in Mind The bank account should be in the name of either the HUF or in the name of the Karta by specifically declaring that the account is that of the HUF only. Only the funds belonging to the HUF should be deposited in such an account. Normally, the Karta of the HUF is entitled to sign the bank transactions. He may, however, also permit the other adult members of the family to sign on behalf of the HUF. Another important thing that can be remembered in connection with HUF property is that where a person wants to transfer some property by Will to the members of his family, he can transfer the same for the specific purpose of the HUF of his son or sons so as to constitute the amounts so transferred through will or so gifted by will as the HUF property of the sons concerned. has the expertise in handling individual taxation. We request you to please contact us immediately if you need any help on any tax matter.

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