HUF as a Tax Planning Tool
Every individual is interested in reducing the overall tax liability on his income. While reducing the overall tax liability, he/ she has got two ways :
- Tax Planning: Tax planning are the procedures to plan the income and tax saving investment in such a manner to minimize the overall tax outgo. The procedure is done within the overall provisions available under the Income Tax Act.
- Tax Evasion: Tax evasion is practice to either not disclose the correct amount of income or to overstate the expenditure and deductions/ exemptions.
Frankly speaking, tax evasion does not pay well as you are selling your comfort and peace for the meagre amounts of tax savings.
The amount of tax saving that can be planned within the ambit of the existing provisions of the Income Tax Act can sometimes be more than that of the tax evasions. Before-hand planning of the issues can save you both money and more importantly peace of mind.
One such way is to create a new legal entity by creating an HUF. Any married India Hindu can create a HUF. HUF is treated as a separate income tax assesse (more easily a separate legal entity). The elder most member of the family is known as ‘Karta’ as is entrusted with all the duties to act on behalf of the HUF. All the others members form co-parceners of the HUF.
Interesting, let us see how it works.
The benefit can be bifurcated into two parts, i.e., Part A and Part B
Part A :
Being a separate legal entity, HUF enjoys tax slabs from zero income. Let us understand how.
Suppose Mr. SMART has got income from salary. Now, Mr. SMART wants to invest in House for rental purposes. Now, if Mr. SMART plans to buy the property in the name of HUF and give it on rent, the rent would be taxable in the hands of HUF. HUF enjoys the tax slab afresh.
This means in case the rental income is upto Rs. 4.28 lakhs (taxable @ Rs. 300,000 on account of deduction @30% under section 24), Mr. SMART will virtually pay no tax.
In case, Mr. SMART would have bought the property in his name, the income would have been taxed at applicable tax rate. Mr. SMART is saving taxes @ Rs. 92,700 at highest tax rates.
Part B :
Now comes the second part. Mr. SMART now has option to invest further as per the permissible limit under section 80C. If Mr. SMART decides to invest Rs. 150,000 in permissible options under section 80C, savings can jump to Rs. 139,050 (in case of rental income of Rs. 450,000). Here rental income of Rs. 450,000 means net receipt during the year of Rs. 6.42 lacs)
Convinced on the benefits of HUF, Now the question comes what are the implications. Let us now understand the intricacies of the deal. The major implications can be as under :
- How to create a HUF?
- Sources of Fund.
- Filing requirements.
- How to create a HUF
Process of creation of HUF is quite simple. Firstly you should a married hindu male. Now, create a HUF deed. Apply for a PAN card. Open a Bank Account. This is it, a HUF is born.
- Sources of Fund
HUF can receive funds from the mother / father of the male or his in laws, friends or relatives in the form of gifts. As a word of caution, members should avoid gifting to the HUF. However, members can give loan to the HUF. Gift received from NRI is exempt upto Rs. 50,000 during the year.
- Filing requirements
Being a separate legal entity, HUF needs to file all the returns including the income tax return every year.
Eligible investments by HUF
HUF can claim benefits under section 80C of the income tax act on the following investments:
- Life insurance policies in the name of the members of the HUF (payment of premium to be made out of the funds of the HUF).
- Tax saving Bank Deposits
- PPF account in the name of its member (funds to be used of the HUF).
Deduction under section 80D can also be claimed on the medi-claim policies taken in the name of the HUF.
The author is a member of the institute of Chartered Accountant with more than 7 years of experience.
The author advices its readers to consult their tax consultants to evaluate the cost benefit analysis of creation f HUF and apply their discretion.
The author can be reached at firstname.lastname@example.org.