Mukesh Patel.in
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international tax expert / columnist / author / speaker

HUF – YOUR TRUSTED TAX SAVER!

You just can’t afford to miss setting up your HUF if you are looking for some valuable tax saving!

               As per Hindu Law, a Hindu Undivided Family (HUF) is a family consisting of all lineal male descendants of a common ancestor and includes their wives and unmarried daughters. Under the Direct Tax Laws in our country, a Hindu Undivided Family (HUF) has been granted the status of an independent tax entity. Thus, an HUF has assumed a useful role in personal tax planning.

HUF DOESN’T NEED A SON!

               No doubt, it is true that to constitute an HUF, there should be atleast two members and there cannot be an HUF consisting of a single member, male or female. However, the myth or misconception, that there must be atleast two male members in the family to constitute an HUF as a taxable unit, needs to be dispelled.

              The Gauhati High Court in the case of ‘CIT vs. Arvind Jhunjhunwalla & Sons’ 223 ITR 45 (Gau.) has held that an HUF gets constituted immediately upon the marriage of an individual. The High Court categorically rejected the contention of the Income-tax Department that until there was the birth of a son in the family, the income of the HUF would be liable to be assessed in the individual case of the Karta. Similarly, the Madras High Court Full Bench in the case of ‘CIT vs. M. Balasubramanian’ 182 ITR 117(Mad.) and the Punjab High Court in the case of ‘CIT vs. Ghanshyamdas Mukim’ 118 ITR 930(P&H) have held that where the donor or testator has given a gift or property under a Will with the clear intention that it would belong to an HUF, the income arising from such property would be liable to be taxed in the hands of the HUF.

PLANNING INCOME FOR THE HUF

                The most popular mode for augmenting property in case of an HUF is by receiving gifts from an outsider, who is not a member of the HUF, declaring his/her express intention that such gift is to be held by the HUF of the recipient of the gift. However, when such a gift is received by the HUF, the provisions of Section 56(2)(vii) need to be borne in mind. As per the said provisions, any gifts exceeding Rs.50,000 received in a financial year are treated as taxable income in the hands of the HUF. 

                 Funds can also be augmented for an HUF by making appropriate provisions in favour of the HUF under a Will or settlement of a trust or through partition of a bigger HUF. In such cases, the provisions of Section 56(2)(vii) are not attracted and no liability to income-tax would arise. Moreover, once an HUF is created with a small corpus, it can receive interest free loans, either from its members or even outsiders and invest these funds productively for earning income for the HUF, either by way of interest, rent, capital gains or even business income.

ENJOY RICH TAX BENEFITS

               The income or wealth of an HUF is taxed separately in the hands of the HUF itself and no part thereof is subject to tax in the hands of any member of the family by virtue of Section 10(2) of the Income-tax Act and Section 5(1)(ii) of the Wealth-tax Act.

               Since an HUF has been granted the status of an independent tax entity just like an individual, it would also enjoy the advantages of separate personal income-tax exemption limit of Rs.2,00,000 and graded tax structure up to the maximum income level of Rs.10,00,000 (effective from FY 2012-13), deductions from gross total income under Section 80 family of the Income-tax Act. Similarly, an HUF would also be entitled to a separate personal Wealth-tax exemption of Rs.30,00,000 (effective from AY 2010-11) and other benefits of exemption under Section 5 of the Wealth-tax Act.

Case Study-1: An individual earns taxable income of Rs.15,00,000 in his personal capacity. He has the scope of earning additional investment income of Rs.11,00,000, which if earned in his personal capacity, would attract the maximum tax at the rate of 30.9% i.e. Rs.3,39,900.

If this investment income is earned in the status of his HUF, which does not have any other taxable income, the HUF can avail the benefit of deduction of Rs.1,00,000 under Section 80C and on the net taxable income of Rs.10,00,000, the tax payable would work out to Rs.1,33,900. Thus, by availing the benefit of the HUF as a separate tax entity in his case, the individual would be in a position to net a clear tax saving of Rs.2,06,000 (Rs.3,39,900 – Rs.1,33,900).

Case Study-2:  An individual has taxable assets of Rs.60 lakhs comprising of jewellery and ornaments valued at Rs.20 lakhs, Motor car valued at Rs.10 lakhs and house property valued at Rs.30 lakhs. Under Section 5 of the Wealth-tax Act, one house property owned by a taxpayer being exempt from wealth tax, the net taxable wealth of the individual would be Rs.30 lakhs, which being within the personal exemption limit of Rs.30 lakhs, he would not be required to bear any wealth-tax liability. If in this case, the individual plans to invest in a second house property, also valued at Rs.40 lakhs, the individual’s net taxable wealth would be computed at Rs. One Crore and after deducting the exemption for one house property of Rs.40 lakhs and the basic wealth tax exemption of Rs.30 lakhs he would be required to pay wealth-tax of Rs.30,000 at the rate of 1% on the balance taxable wealth of Rs.30 lakhs.

If, however, the individual decides to invest the second house in the case of his HUF, he would avail the benefit of exemption of one house property in the HUF’s case and thus avoid the recurring wealth-tax liability of Rs.30,000 every year.

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