With March-end fast approaching, most people meet their chartered accountants with only one wish – how to reduce their tax liability. One such way is through the formation of a Hindu Undivided Family (HUF). HUF is a separate entity in itself and qualifies for all tax benefits under Section 80C (up to Rs 1 lakh), 80D (health insurance premium), 80G (donation), 80L (income from bank account), Section 54 (capital gains) and so on.
Tax slabs applicable to income of an HUF is similar to that of any individual taxpayer, with the basic exemption at Rs 2 lakh. First, any two family members with the karta (male member of the family) can create an HUF. For a married individual, family will mean wife / husband and children, if any. "But, where the father by way of a will, passes on the self-acquired assets to an HUF instead of his son(s), this also creates the assets for the the HUF of son(s)," says Kuldip Kumar, executive director (tax & regulatory services), PricewaterhouseCoopers India.
Even otherwise, you can create an HUF, which is not very difficult. Only a creation deed of the HUF needs to be furnished on a stamp paper (optional). Then, you need to apply for a Permanent Account Number (PAN) and make a bank account for the HUF. Families can receive monetary gifts from parents or gifts from relatives through the HUF. Even strangers can gift up Rs 50,000. The money received by the HUF can be invested. And the income generated from the investment account will qualify for tax exemption as a separate entity.
Explains Vaibhav Sankla of H&R Block, "Say, parents want to gift Rs 10 lakh to their son, the son can instead ask for Rs 3 lakh (to be given) every year to the HUF. From this, if Rs 1 lakh is invested in a five-year bank deposit, the son will get tax benefit under Section 80C and the remaining Rs 2 lakh will not be taxable."
Similarly, a second property can be bought in the name of the HUF for deduction on interest and principal repayment on home loan. Wealth tax liability can be lowered if assets like second home (not let out) and gold are owned in the HUF's name.
Members of HUF cannot get tax benefits for gifting their existing assets. Because, under Section 64 if a member of an HUF gifts the HUF, the income generated from it is clubbed with the member's income and taxed according to slab.
Additionally, a member of an HUF has to maintain books of accounts and all paperwork for the HUF separately. Transfer of assets to HUF happens only one-way. You can create assets for the HUF, but these can be taken out only by dissolving the entity. However, financial assets, gold and cash, can easily be distributed among members.
If a property is in an HUF's name it may not find many takers as everybody wants a clear property title. If there is a legal dispute around the property, then selling it can become impossible. On the death of the father, the (eldest) son can be the karta for the HUF. Married daughters cannot take charge. The solution lies in dissolving the HUF, if all the members agree. A partial dissolution is not possible.