Blog

Hindu Undivided Family (HUF)

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 :

  1. 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.
  2. 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 :

  1. How to create a HUF?
  2. Sources of Fund.
  3. Filing requirements.
  4. 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.

  1. 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.

  1. 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:

  1. 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).
  2. Tax saving Bank Deposits
  3. 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.

Note:

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 caapuravindia@gmail.com.

House Rent Allowance (HRA)

Hello Friends ..

Here we are going to discuss about House Rent Allowance (commonly said as ‘HRA’). Most of the salaried individuals are often explained in a manner that is hard to even understand, forget applicability and exemption available.

History

HRA was paid to the employees to allow them  to offset the rental cost in the city of employment. Accordingly, the amount paid was exempt by the Government considering the nature of it being compensate the rent paid by the employee.

Computation

Now first of all we need to understand here that HRA is NOT EXEMPT. The amount in salary received is fully taxable as any other component of the salary. The exemption is granted the least of the three components which are as follows :

  1. Actual HRA received
  2. Rent paid in excess of 10% of (Basic Salary + DA)
  3. 50% / 40% (depending on the place of residence) of (Basic Salary +DA)

Confused ..

Lets understand it with an example now. Lets Suppose Mr. SMART receives the monthly salary as follows :

  1. Basic Salary : Rs. 1,00,000
  2. House Rent Allowance : Rs. 50,000

He pays rent of Rs. 40,000 for the house in Delhi (eligible for 50% exemption)

Now, the exemption will be least of following :

  1. Actual HRA : Rs. 50,000
  2. Rent paid in excess of 10% of the basic salary : Rs. 30,000 (40,000 – 10,000)
  3. 50% of the Basic Salary : Rs. 50,000 (50% of Rs. 100,000)

Now the taxable salary for Mr. SMART is as follows :

Head            Total                    Taxable                 Exempt

Basic       Rs. 100,000       Rs. 100,000            Rs. Nil

HRA          Rs. 50,000          Rs. 20,000        Rs. 30,000 (least of the three of the above table)

Now the taxable monthly salary of Mr. SMART is Rs. 120,000.

HRA Calculator : HRA Calculator

Change to the parameters

The calculation of exemption is subject to the following components :

  1. Basic Salary
  2. House Rent Allowance
  3. Rent paid
  4. City of residence (movement between cities eligible for 50% / 40% exemption)

If any of the above component changes during any time during the year, the computation of exemption is bound to change. So, we should recompute the exemption in case any of the above component changes.

Cities eligible for 50% exemption of Basic Salary

Delhi, Mumbai, Chennai, Kolkatta

For your help we are attaching an excel file that helps you compute the taxability of HRA.

TIPs

In case Mr. SMART is staying in a house owned by his/her parents or any relative, Mr. Smart can pay rent to the landlord and claim exemption. This will also result in legitimate income to the family members and benefit Mr. SMART.

TDS

As per the recent amendments Mr. SMART is bound to furnish the PAN of the landlord in case monthly rent paid is in excess of Rs. 8,333.

For Self Employed :

For self employed, HRA exemption is not available, however they can claim deduction under section 80 GG.