LOOKING at ways and means to split your identity for the purpose of better accounting and tax-saving provisions? Well, you could take a cue from the times when people lived in joint families and shared joint incomes. The same concept can help you save on income tax if you open a Hindu Undivided Family (HUF) account. In fact, the account — coming under the provisions of the HUF Act — can help you enjoy driving your brother’s or father’s luxury car and yet save some tax by claiming depreciation on the same in your business. The only thing required is to know the details of this Act and its implications in saving tax.
FLEXI-OPTIONS
Unlike the name suggests, a HUF does not mean only a Hindu family but even Jains, Buddhist and Sikhs can form HUFs. Generally a HUF consists of at least two members, of which one must be a male, and are lineally ascended from common ancestors. But smaller partitioned families can also form HUF with only one male member. According to the Supreme Court (C.I.T. v. Veerappa Chettiar, 76 I.T.R. 467), an HUF can consist of only female members after the death of the last male members. Alternatively, lineal ascendants can also form a HUF by way of gifting assets for achieving an objective. A HUF further includes wives and unmarried daughters of the family.
As the nomenclatures go, the senior-most member is known as karta. The co-parceners are males, while females are known as members. A karta usually manages the assets of the HUF. Co-parceners enjoy the right to ask for partition, which takes place by distributing the assets of the HUF. In case of partition, members get only maintenance. The assets of a HUF include either gifts given by members/ karta or bequeathed assets or assets received on partition.
HANDY IN SAVING TAX
According to the Income-tax Act, an HUF is a separate entity and enjoys the same exemptions that any individual gets. It is eligible for a slab rate and 80C deductions. An income up to Rs 1.5 lakh is taxfree for the HUF, too, and it can earn money from different sources such as business property, capital gain and other sources, except salary. Since exemptions and deductions can be claimed twice, by creating a HUF, there can be a significant tax advantage. For instance, if the total income of an individual is Rs 3 lakh, he is liable to pay a tax of Rs 15,000 assuming no investment is made for tax deduction. But if the person is a member of HUF and half of the amount is taxable in hands of HUF and rest in his own hands, the person is not liable to pay any tax, as any income up to Rs 1.5 lakh is tax-free.
REAPING OTHER BENEFITS
Once the HUF is formed with some assets either received from ancestors or contributed by members, this asset base of the HUF can also be increased by borrowings and thereafter using the assets for business. The wealth earned by the HUF will be taxable only in hands of HUF and will not be clubbed with member’s earnings. Even if the business fails, the liability will not be with members. The liability of a HUF is limited to its assets. Hence, no liability lies with members on their individual capacity. Usually, an employer restricts an employee to run any business separately. So, an employee can use the HUF window to run business and also save on tax.
POINTS TO PONDER
A HUF is formed for the betterment of the whole family and thus, any business decision will require the consent of all members. One must think for a long-term viability of the HUF because otherwise, it may lead to an acrimonious situation in the family in future.
A HUF gives tax advantage but one must remember that once the income of a family is assessed as a HUF, it will continue to be assessed as a HUF income, until the HUF is partitioned completely. Moreover, since every member owns the assets of the HUF, these cannot be used only for individual interest. Importantly, the income earned by the HUF — from investments made in a partnership firm, managed either by the karta or other members — will be taxable in the hands of the HUF, but salary drawn by members will be clubbed with their own earnings. One can pass on one’s asset to the HUF but this usually does not give any tax benefits. Any gift to the HUF of more than Rs 50,000 is taxable in the hands of the HUF.
FLEXI-OPTIONS
Unlike the name suggests, a HUF does not mean only a Hindu family but even Jains, Buddhist and Sikhs can form HUFs. Generally a HUF consists of at least two members, of which one must be a male, and are lineally ascended from common ancestors. But smaller partitioned families can also form HUF with only one male member. According to the Supreme Court (C.I.T. v. Veerappa Chettiar, 76 I.T.R. 467), an HUF can consist of only female members after the death of the last male members. Alternatively, lineal ascendants can also form a HUF by way of gifting assets for achieving an objective. A HUF further includes wives and unmarried daughters of the family.
As the nomenclatures go, the senior-most member is known as karta. The co-parceners are males, while females are known as members. A karta usually manages the assets of the HUF. Co-parceners enjoy the right to ask for partition, which takes place by distributing the assets of the HUF. In case of partition, members get only maintenance. The assets of a HUF include either gifts given by members/ karta or bequeathed assets or assets received on partition.
HANDY IN SAVING TAX
According to the Income-tax Act, an HUF is a separate entity and enjoys the same exemptions that any individual gets. It is eligible for a slab rate and 80C deductions. An income up to Rs 1.5 lakh is taxfree for the HUF, too, and it can earn money from different sources such as business property, capital gain and other sources, except salary. Since exemptions and deductions can be claimed twice, by creating a HUF, there can be a significant tax advantage. For instance, if the total income of an individual is Rs 3 lakh, he is liable to pay a tax of Rs 15,000 assuming no investment is made for tax deduction. But if the person is a member of HUF and half of the amount is taxable in hands of HUF and rest in his own hands, the person is not liable to pay any tax, as any income up to Rs 1.5 lakh is tax-free.
REAPING OTHER BENEFITS
Once the HUF is formed with some assets either received from ancestors or contributed by members, this asset base of the HUF can also be increased by borrowings and thereafter using the assets for business. The wealth earned by the HUF will be taxable only in hands of HUF and will not be clubbed with member’s earnings. Even if the business fails, the liability will not be with members. The liability of a HUF is limited to its assets. Hence, no liability lies with members on their individual capacity. Usually, an employer restricts an employee to run any business separately. So, an employee can use the HUF window to run business and also save on tax.
POINTS TO PONDER
A HUF is formed for the betterment of the whole family and thus, any business decision will require the consent of all members. One must think for a long-term viability of the HUF because otherwise, it may lead to an acrimonious situation in the family in future.
A HUF gives tax advantage but one must remember that once the income of a family is assessed as a HUF, it will continue to be assessed as a HUF income, until the HUF is partitioned completely. Moreover, since every member owns the assets of the HUF, these cannot be used only for individual interest. Importantly, the income earned by the HUF — from investments made in a partnership firm, managed either by the karta or other members — will be taxable in the hands of the HUF, but salary drawn by members will be clubbed with their own earnings. One can pass on one’s asset to the HUF but this usually does not give any tax benefits. Any gift to the HUF of more than Rs 50,000 is taxable in the hands of the HUF.
