If tax
hawks give sleepless nights, then the law of the land also opens a window for
respite. But due to low awareness of legal matters, most of us end up coughing
extra money, which otherwise could have been saved easily. Take the case of
38-year-old Ajit Banerjee who recently purchased a luxury four-wheeler.
Banerjee, a Hindu by religion, registered the car in the name of a business
owned by his brother.
The
purpose was to reap in the benefits of Hindu Undivided Family (HUF) Act, so that
not only Ajit could buy his dream machine but also help his brother do tax
planning for his firm by claiming depreciation on the car. As under the HUF Act,
deductions from gross total income are done in the same manner as for an
individual.
Simplifying
the law
So in absolute terms
what is an HUF? “HUFs are automatically born, which are euphemistically
referred to as creation of ‘HUF’,” explains Sandip Mukherjee,
executive director, PricewaterhouseCoopers. According to analysts, an HUF
consist of at least two members (of which at least one should be male), and is
automatically born with the ancestral property being received from or belonging
to three generations above (example: if Mr X, a married man, receives ancestral
property belonging to his great grandfather, the same will automatically be
considered as property of Mr X’s HUF).
“Alternatively, the HUF
could also get formed with the asset gifted or given, preferably by a lineal
ascendant, with a specific direction for the use of HUF,” adds
Mukherjee.
Technically
speaking, an HUF always exists in a Hindu family and never gets
‘created’. However, from a tax perspective, an HUF is created when
it gets vested with assets, property or any income generating activity.
Family
advantage
As per tax experts,
the most significant advantage is that any income received by an individual as a
member of the HUF from its corpus, is not taxable in his/her individual
capacity, as it would be taxable in the hands of HUF. The income of the HUF is
eligible to the same slabs and basic exemptions as available to an individual.
The HUF is also eligible for deductions under Section 80C.
“Hence, if the total
personal income of an individual is split into what is assessed in his hands and
what is assessed in the hands of the HUF of which he is a member, there is an
overall tax savings,” says Amitabh Singh, partner, global tax advisory,
Ernst & Young, India. However, you should also keep in mind that once income
of family is assessed as an HUF, it would continue to be assessed as HUF income,
until such time the HUF is partitioned completely.
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