Benefits of creating a HUF

HUF - Total Basic Idea for Businessman / Estate Planner

WHAT IS A HINDU UNDIVIDED FAMILY?

1. In general, HUF means a body of persons lineally descendant from a common ancestor including their wives and unmarried daughters, who are staying jointly.

2. The head of the family who is the eldest male member generally is treated as Karta of the HUF. Karta is entrusted with the duty of management of the HUF assets for the benefit of the family.

3. Members lineally descended from the common ancestor up to four degree are Coparceners of HUF. Any coparcener can ask for partition of HUF.

4. After amendment to Hindu Law in 2005, daughter born in the family also acquires same right as son of being a coparcener and continues to be so even after her marriage.

5. Wives and mother are only members of the HUF but not coparceners.

WHY - ?

Because you can save up to INR 5.5 Million in Present Value Terms!!

Assumptions:

1. Your current age is 30 years and your life expectancy is 70 years

2. Government increases the basic exemption limit by average INR 30 k per year and deductions by average INR 4 k per year with no other significant change in tax rates or slabs (which is quite conservative).

3. Inflation / Post tax rate of return on investment is 7% p.a. for discounting purpose.

4. You are able to utilize the full potential of savings available through HUF.

HOW - ?

1. An HUF is treated as a separate entity under the Income Tax Act, 1961;

2. Basic Exemption Limit of INR 200 k;

3. Benefit of slab rate of tax of 10% on incremental income up to INR 500 k and 20% on further incremental income up to INR 1 Million.

4. Deduction under section 80C of the Act of INR 150 k for certain investments in the name of its members (LIP, DAP, PPF, ULIP) as well others like under section 80D, 80 TTA, etc.

Other Benefits:

1. Income received by members from HUF property or income, exempt u/s. 10(2) in the hands of member.

2. Benefit u/s. 23(2) of the Act for one self occupied property for the own use of the family.

3. Deduction u/s. 24(b) of the Act up to INR 200 k for interest on loan for acquisition of self occupied property.

4. Presumptive taxation of business income u/s. 44 AD.

5. Distribution of capital assets on total or partial partition of HUF not regarded as transfer u/s.47(i) – no capital gain to HUF.

6. Exemption from capital gains u/s.54 (residential house property), 54B (rural agriculture land), 54F (investment in first or second residential house), 10(37) (compulsory acquisition of urban land).

How can it come in existence?

1. HUF is creature of law and automatically comes into existence on the marriage of a Hindu male.

2. Birth of a child is not necessary for the purpose of recognition of the status of HUF.

3. HUF can acquire properties by partition of larger HUF or ancestral property or by way of Gift (however gift by members attracts clubbing provision)  So if you are married and does not have any capital into your HUF, your HUF still subsists and you can infuse capital by way of gifts.

How can you create & other compliance requirement ?

1. Make a declaration of HUF (an affidavit on a stamp paper of INR 100).

2. Apply for a PAN card in the status of HUF.

3. Open a separate bank account in the name of Karta on behalf of HUF.

4. Make formal gift deeds in respect of gifts received from relatives of member (the source of gift for the donor should also be recorded).

5. Maintain Separate books of accounts for HUF.

6. Keep the individual money and property separate from those of HUF.

7. File annual return of income for the HUF claiming the benefits.

Negative Aspects – Involved Risks:

1. HUF property cannot be transferred by WILL, Karta cannot sell the property and dispose the proceeds in his individual desire.

2. Family can decide mutually for disproportionate distribution among members by partition through mutual consent.

3. Any coparcener can ask for partition and equal share from the family property.

4. In case of court dispute provision of Hindu Law shall apply.

5. Therefore, there are chances that you may end up spending more rather than saving, this aspect needs to be kept in mind while indirectly throwing personal property into family net.

Thanks for reading and gaining knowledge about tool of tax planning. Kindly write us your feedback, opinion or query for any matter.  Stay Tune with us we shall come up earliest with Basic about forensic auditing.

Cheers!