How to save tax through an Hindu Undivided Family -- Part I 1. What is an HUF? Ans: An HUF, or a Hindu Undivided Family, is a separate tax entity in addition to individual persons who are members of such a family. If you are Hindu, Buddhist, Jain or Sikh, you can have an HUF as a separate tax entity. You can claim all tax benefits under Wealth Tax and Income Tax. An HUF is eligible for those exemptions that are available to a resident Indian who is not a senior citizen. It can own property and also have its own business. 2. Who all are included in the HUF? Ans: The HUF includes those persons who, by birth, acquire an interest in some joint family property. It also includes all lineal descendents of these persons, and their wives, and children, both sons and daughters. In Maharashtra, even married daughters can remain a part of the HUF. 3. Who are the parties in an HUF? Ans: An HUF includes the following parties: Karta The Karta is the oldest male family member. In the event of the death of the karta, his eldest son becomes the next karta, who will be followed by the next son in line if the eldest son does not want to be the karta. If there are no sons, the unmarried daughter can become the karta in the unfortunate event of the death of her father. If the karta passes away, the assessing income tax officer should be intimated of his death and the appointment of the new karta. Coparceners All the male members are called coparceners. This includes the sons, grandsons and great-grandsons of the karta, who holds the joint family property. These coparceners acquire an interest in the family property, by virtue of their birth. A coparcener has the right to demand that the family property gets divided, so that they can receive their share in the property, or in whatever assets the HUF holds. Members The female members of the family, this includes wives and daughters (married or unmarried) are called members. Members do not have coparcenery rights. However, on 9th September 2005, the Hindu Succession Act was amended to include the daughters of the karta as coparceners. Hence the list of coparceners is amended to be as follows: - Holder of the property - Sons and daughters - Grandsons - Great-grandsons A daughter continues to be a coparcener even after her marriage, regardless of whether she is a member in her husband�s HUF. 4. How does an HUF come into being? Ans: An HUF automatically comes into being as soon as you get married. Hence an unmarried man cannot form an HUF and be his own HUF�s karta, but he can still be a member or coparcener of his family�s HUF. No formal action is required to form an HUF. 5. How does one infuse capital into the HUF? Ans: In order to infuse capital into the HUF, you have to first take the following steps: a) Open a bank account in the name of the HUF (the bank will provide the format for the karta of the HUF to open the savings account) b) Apply for a PAN Card for the HUF c) Transfer assets / property to the HUF � keep in mind clubbing provisions and tax on gifts to the HUF 6. What are the points to be kept in mind when creating capital for the HUF? Ans: When creating capital or infusing capital into the HUF, keep the following points in mind: a) Do not transfer your own assets or funds into the HUF, any income arising from this asset / money will be clubbed with your own income and you will be taxed on it. This means, that if you transfer your own money to the HUF, and the HUF invests this money into instruments yielding tax free income, then you do not need to pay any tax, as the income earned is tax free. b) If there is ancestral property and there is income earned on this property, this property can be property of the HUF and any income on this property can be classified as HUF income c) If ancestral property or assets are sold, the money received on such a sale can be transferred to the HUF d) Suppose there is no ancestral property, then one way of infusing capital into the HUF is by way of gifts. Gifts received by members of the HUF on occasions such as birthdays or marriage are exempt from tax up value of to Rs. 50,000 (this is to prevent tax evasion and money laundering) 7. What are the rules to be kept in mind when the HUF receives gifts? Ans: There are certain gifting rules that should be kept in mind, these are as follows: a) When a donor (giver of a gift) gives a gift in cash or in kind, it might be taxable in the hands of the donee, which in this case is the HUF b) If the donor gifts movable or immovable property for less than its market value to the HUF, the HUF has to pay taxes on the deemed fair value of the gift. c) Previously, cash gifts under Rs. 50,000 were tax free. If the gift was more than Rs. 50,000, then the entire amount was taxable. Now, any gift received either in cash or in kind of a value more than Rs. 50,000 is taxed in the hands of the HUF as �Income from Other Sources�. However there are some exceptions: (i) Gifts from relatives of members of the HUF (who will be the donees) are exempt from this rule. Relatives here includes the following: Spouse of the donee, Spouse�s brother or sister, Brother or sister of the donee, Spouse of brother or sister of the donee, Donee�s parent�s brother or sister, Donee�s parent�s brothers or sisters spouse, Lineal ascendant or descendent of the donee or donee�s spouse. (ii) Gifts at the time of marriage are exempt from tax, whether from a friend, relative or colleague. Hence if a member of the HUF is getting married, the gift can be made to the HUF, and it will be exempt from tax in the hands of the HUF. (iii) Movable or immovable property received through a Will by way of inheritance is exempt from tax Any income received by the HUF can be further invested into various investment avenues such as shares (through the HUF�s demat account), mutual funds , fixed deposits, property and so on, and the profit or interest earned will be taxable in the hands of the HUF, as it is income of the HUF. 8. What are the deductions & exemptions available to the HUF? Ans: To start with, as the HUF is a separate entity in the eyes of the taxman, it is entitled to a basic exemption of Rs. 1,80,000, just like a Resident Indian (male). This means that any income earned in the year up to Rs. 1,80,000 is not taxable. All the tax slabs are the same as those for a resident Indian (male). Section 80 C Over and above this, the standard Section 80C deductions apply to the HUF as well. This means that the HUF can invest its income earned (either earned through salary, or business, or property, or investments) into any of the 80C avenues i.e. LIC premium paid (for life insurance of its members), NSC, ELSS, PPF (invested for its members) and so on. Section 80 CCF An HUF can also invest into long term infrastructure bonds and claim a deduction under Section 80 CCF Section 80 D If the HUF is paying for mediclaim premium for its members, it can avail a deduction up to Rs. 15,000 (Rs. 20,000 if the member is a senior citizen) under Section 80 D Section 80 DD An HUF can also claim a deduction up to Rs. 50,000 for medical expenses, rehabilitation or training expenses incurred for the maintenance of a disabled member of the HUF, under Section 80 DD. Capital Gains on House Property If any property that is held by the HUF is sold and there is capital gain, the HUF can save tax on these gains by reinvesting the proceeds into another property as per the standard rules (purchase a new property within 2 years, or construct a property within 3 years), and also has the option of investing the gains into NHAI or R EC bonds for the standard 3 year lock in period. Interest earned on these bonds is taxable in the hands of the HUF. If you are planning on buying a second house, it would be advisable to hold it in the name of the HUF, if possible. In Part II of this article, we will deal with more exemptions (for example wealth tax) blending of assets, partitioning of the HUF, whether remuneration can be paid to the karta and more such concerns regarding the HUF. Be sure to catch How to Save Tax Through an HUF
Posted on: Thu, 31 Oct 2013 04:10:01 +0000
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