Your HUF account can get your extra tax benefits
A Hindu undivided family (HUF), or, a joint Hindu family, is a creature of law. Therefore, you become member of HUF by your status and it cannot be created by an agreement between two parties, except in case of adoption. For instance, a child automatically becomes member in his father’s HUF by his birth.
HUF stakeholders: Under Hindu law, HUF is defined as a family that consists of all males, lineally descended from a common ancestor and their wives. After amendment of The Hindu Succession Act, 1956, with effect from September 9, 2005, all daughters, whether unmarried or married, are coparceners of the HUF. Daughter continues to remain the coparcener in her father’s HUF even after she gets married, and also, becomes member of her husband’s HUF as well.
There should be minimum two members to constitute the HUF. As a rule, the father or the eldest male member of the family becomes manager or ‘karta’ of the HUF, but, in the light of the amendment in the Hindu Succession Act in 2005, an unmarried daughter, in the unfortunate death of her father, can become the karta of the HUF, if she has no brother. In the event of the death of the karta and in the absence of any male member, two females can continue to run the HUF and the senior female can take over as the karta.
Creating HUF: HUF is a creature of law, and hence, it cannot be created by acts of two parties except in case of adoption. Actually, when we talk about creating HUF, we actually imply creating a separate entity for tax purposes. HUF comes automatically into existence at the time of marriage of an individual, and no formal action needs to be taken for the same. HUF is governed by Hindu law and not by the I-T Act. Therefore, individuals belonging Hindu, Jain, Sikh and Buddhist, to whom the Hindu Succession Act applies, are only eligible to form HUF, and other religions are not allowed.
Tax planning with HUF: HUF is assessed as a separate entity in income tax. It can have its own assets and liabilities and even a regular source of income that can be taxed separately. For example, if an ancestral residential property is rented out, then, the rent would be considered as the family’s income and not as income of an individual. The income of the HUF is taxable in the hands of the HUF and not in the hands of any individual. The HUF is liable to pay tax if its total income exceeds Rs 2,00,000 in FY 2013-14 (AY 2014-15). The rate of tax is the same as applicable to an individual. The HUF can claim deduction from gross total income of the HUF under section 80C to 80U of the I-T Act as in case of an individual, but, HUFs are not permitted to open a PPF account, with effect from May 13, 2005.
You can save lot of tax by dividing your income between individuals and the HUF. For instance, if you have a total income of Rs 10 lakh from your existing proprietary business in financial year 2013-14, you are liable to pay tax of Rs 1,33,900. Now if you set up a new business and earn additional income of Rs 5,00,000, you will pay additional tax of Rs 1,54,500 because you have already crossed the limit of Rs 10 lakh and are liable to pay 30 per cent tax on the income exceeding Rs 10 lakh. It means you pay total tax of Rs 2,88,400 (inclusive of education cess). But, if you have additional business under the new entity called HUF, you will pay the tax of Rs 2,06,00 on your gross total income of Rs 5,00,000 earned under HUF. As your total income will come down to Rs 4,00,000 after claiming deduction of Rs 1,00,000 towards investment in various eligible schemes, Section 80C of the I-T Act, and you will pay tax only on Rs 2,00,000, exceeding the basic exempt limit of Rs 2,00,000.
