Now that you are well aware of the formalities attached to HUF, let us discuss a bit about the intricacies involved in it.
Before that, if you have not read the previous article on HUF yet, please click the link below:
Now coming to the tax benefits..
If your salary income is 5 lakhs and you want to start a side business and earn another 5 lakhs, then you can do that business in HUF and that income can be called as HUF income.
Case 1 (without HUF you have one pan card):
Personal Income 5 lakh +Business Income 5 lakh =Total income is 10 lakh
Invest benefit 80c – 1 lakh
Basic deduction – 2 lakh
so total taxable income is 7 lakh. (Tax liability = 90,000 approx)
Case 2 (with HUF File you have 2 pan card):
Personal Income 5 lakh – Invest benefit 80c 1 lakh – Basic deduction 2 lakh
Taxable income is 2 lakh ( tax liability 20,000)
HUF Income 5 lakh – invest benefit 80c 1 lakh – basic deduction 2 lakh
Taxable income is 2 lakh (tax liability 20,000)
So you are saving approximately Rs. 50,000 Per Year when you have a HUF file.
Returns on investments made using the HUF’s income will be considered as that of the HUF and will be taxed accordingly after considering tax-saving investments. An HUF can also provide loans to members and coparceners of the HUF for various purposes. It also comes in handy if a person decides to start a business in the name of a HUF, which has his children as members. In such a case, everyone has an equal claim on the business. “Salaries can be paid to members if they are managing the business and effectively contributing to the functioning of the business”.
These are some of the benefits that make HUF attractive. An important point to note here is that HUF cannot be broken into parts; all members have to agree to dissolve an HUF.
The Drawbacks of a HUF
The assets of the individual will now become the assets of the HUF as a family unit comprising of the individuals and all members of the family (including an unborn child in the womb of a mother). All members of the family would have a right on the assets unlike the case in which the assets were owned by an individual in his own name. Therefore, proper caution should be exercised before transferring assets in the name of the HUF.
An Individual cannot transfer his assets to the HUF since the Clubbing provisions u/s 64 (2) of the Income Tax Act, 1961 would apply and the income earned from the transferred asset would continue to be taxed as being in the hands of the transferee.
Similarly, Partition of the HUF will have to be carefully thought through. The dissolution of an HUF will take place after the full partition of the assets of the HUF amongst its members. This may require execution of legal documentation to make it foolproof.
A penny saved is a penny earned. Use of a HUF structure is an efficient and legal way to save tax, especially for high-income earners. This helps them maximize the benefits available under the existing provisions of the Income Tax Act 1961 to plan and save tax on their income which otherwise may have been taxed at higher rates.
Word of Caution
This article merely seeks to provide you with some information on possible avenues to reduce your tax liability. The establishment of a HUF, its capitalisation, maintenance of books of accounts and records, filing tax returns, distribution of assets etc. should be managed meticulously to avoid any issues from Income Tax Authorities. Hence, please consult a Tax practitioner or a Practising Chartered Accountant for guidance before you try and use this route.
Q & A
The current value of the plot held by a HUF is Rs. 1.5 Crore. If the five members of the HUF sell the property, what would be their tax liability after they invest Rs 30 lakhs each in REC bonds for capital gain relief?
In case of the capital gain earned by HUF, exemption would be allowed for HUF only. So the capital gain would be taxable as being in the hands of the HUF. There is no tax liability for the individual members. Only the HUF will be able to avail the exemptions under sec 54EC by investing in specified bonds. To avail the exemption, only the capital gain needs to be reinvested and not the entire sale consideration. HUF will also be eligible for indexation benefits.
* “Stridhan” is absolute property of a woman; hence income arising from there is not taxable as income of HUF. The property received by way of a will in favour of the HUF can become the corpus. However, funding an HUF is tricky. Capital can be brought in only through gift or inheritance subject to gift tax laws, which say that any amount above Rs.50,000 from non-family members is subject to tax. The Gold Grand father/father had can be sold and the money can be deposited in HUF. Mother/grand mother savings also can be deposited in HUF as capital/corpus.
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