Skip to main content

How can you save tax with HUF status?

Invest In Tax Saving Mutual Funds Online

Call 0 94 8300 8300 (India)

 

Hindu Undivided Family (HUF)

When Shashank and Mitali got married, they did not bother much about their finances. After all, both were well qualified and had well paying jobs. In addition, Shashank also earned rental income from ancestral property. But after seeing the huge amount they paid as taxes (after investing in the usual tax saving instruments), they spoke to Shashanks former classmate, who is a practising chartered accountant.

 

That is when they realised that they could save taxes by setting up a Hindu Undivided Family (HUF).

The HUF concept is not new in India, and is one of the best ways to save tax. Any married man from the Hindu, Jain, Sikh, or Buddhist community can form an HUF, and will act as the " Karta" or the head of this family. According to Indian law, an HUF will be considered as aseparate entity from the individual for tax purposes, which benefits married couples from these communities to save a substantial amount on taxes.

HUF is a separate entity in itself and qualifies for all tax benefits under Section 80C ( up to ₹ 1 lakh), 80D ( health insurance premium), 80G ( donation), 80L ( income from bank account), Section 54 ( capital gains) and so on.

Tax slabs applicable to income of an HUF is similar to that of any individual taxpayer, with the basic exemption at ₹ 2 lakh. First, any two family members with the karta (male member of the family) can create an HUF. For a married individual, family will mean wife / husband and children, if any.

An HUF can be used for any purpose apart from receiving salaries, which means that one can form an HUF to keep ancestral property, or to run a business. For example, if a married man has a salary of ₹ 5 lakh, and gets rent on ancestral property of ₹ 3 lakh, as an individual he will be paying taxes of approximately ₹ 1 lakh ( assuming ₹ 1 lakh is invested under section 80C). However, if he shifts the property to an HUF, then he will be paying only ₹ 20,000 as taxes as an individual and the HUF will be liable for no taxes ( assuming that both the individual and the HUF has invested ₹ 1 lakh under section 80C). This results in a tax saving of around ₹ 80,000.

Let us look at a more detailed example to see how a HUF can save one's taxes.

Forming of an HUF is relatively simple, with all married men and their wives becoming an HUF automatically.

There are, however, a few simple procedures to be followed, such as executing a deed on a stamp paper to transfer assets to the HUF -this can be property, cash, jewellery, etc. One will also have to get aPAN card in the name of the HUF and open a bank account. There can be multiple instances of HUF's in each family, with each married couple being part of their own HUF.

There are also cases with women only HUF's, where the Karta has passed away, and left behind only female descendants - in such a case, the daughter assumes the role of the Karta.

Transferring money into an HUF is not as easy as it seems as one cannot just transfer money or assets into the HUF name, as this gets combined into a single entity under the existing law and taxed as such. The ideal way to setup a HUF is to put some of the gifts ( cash, jewellery, etc) received at one's wedding into the HUF. The other way is to set up the HUF using ancestral property from a will though in this case the will should specify that the property will go to the HUF and not the individual.

Another pitfall one should be aware of is that while transferring gifts to the HUF, there is no exemption on receiving gifts from specified relatives like in the case of an individual - the HUF is liable to pay taxes on all gifts. However, since the HUF gets tax benefits like an individual entity, gifts of up to ₹ 2 lakh ( limit can go up to ₹ 3 lakh if the tax benefits under Section 80C are fully used) are exempt from taxation.

Assets and liabilities in the name of the HUF will belong to the HUF and this will be treated as a separate entity. For example, if a business is being run under an HUF all business expenses will be deducted from the HUF income. This includes any salary paid to family members who are part of the HUF.

Additionally, a member of an HUF has to maintain books of accounts and all paperwork for the HUF separately. Transfer of assets to HUF happens only one- way. You can create assets for the HUF, but these can be taken out only by dissolving the entity. However, financial assets, gold and cash, can easily be distributed among members. But there are some disadvantages also by forming an HUF. For instance, if you are looking to sell aproperty that is in an HUF's name, it may not find many takers as everybody wants a clear property title. If there is a legal dispute around the property, then selling it can become impossible.

An HUF can be dissolved if all the members agree. A partial dissolution is not possible.

Happy Investing!!

We can help. Call 0 94 8300 8300 (India)

Leave your comment with mail ID and we will answer them

OR

You can write back to us at PrajnaCapital [at] Gmail [dot] Com

---------------------------------------------

Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.

Invest Tax Saving Mutual Funds Online

Tax Saving Mutual Funds Online

These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)

Download Tax Saving Mutual Fund Application Forms from all AMCs

Download Tax Saving Mutual Fund Applications

These Application Forms can be used for buying regular mutual funds also

Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )

  1. ICICI Prudential Tax Plan Invest Online
  2. HDFC TaxSaver Invest Online
  3. DSP BlackRock Tax Saver Fund Invest Online
  4. Reliance Tax Saver (ELSS) Fund Invest Online
  5. Birla Sun Life Tax Relief '96 Invest Online
  6. IDFC Tax Advantage (ELSS) Fund Invest Online
  7. SBI Magnum Tax Gain Scheme 1993 Invest Online
  8. Sundaram Tax Saver Invest Online
  9. Edelweiss ELSS Invest Online

------------------

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds Invest Online
      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    1. Mid and SmallCap Funds Invest Online
      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    1. Small and MicroCap Funds Invest Online
      1. DSP BlackRock MicroCap Fund
    1. Sector Funds Invest Online
      1. Reliance Banking Fund
      2. Reliance Banking Fund
    1. Tax Saver MutualFunds Invest Online
      1. ICICI Prudential Tax Plan
      2. HDFC Taxsaver
      3. DSP BlackRock Tax Saver Fund
      4. Reliance Tax Saver (ELSS) Fund
    2. Gold Mutual Funds Invest Online
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

Popular posts from this blog

All about "Derivatives"

What are derivatives? Derivatives are financial instruments, which as the name suggests, derive their value from another asset — called the underlying. What are the typical underlying assets? Any asset, whose price is dynamic, probably has a derivative contract today. The most popular ones being stocks, indices, precious metals, commodities, agro products, currencies, etc. Why were they invented? In an increasingly dynamic world, prices of virtually all assets keep changing, thereby exposing participants to price risks. Hence, derivatives were invented to negate these price fluctuations. For example, a wheat farmer expects to sell his crop at the current price of Rs 10/kg and make profits of Rs 2/kg. But, by the time his crop is ready, the price of wheat may have gone down to Rs 5/kg, making him sell his crop at a loss of Rs 3/kg. In order to avoid this, he may enter into a forward contract, agreeing to sell wheat at Rs 10/ kg, right at the outset. So, even if the price of wheat falls ...
Read more

Guide to pension plans in the form of Insurance

  Pension plans ensure that you are financially secure during your golden years. Take a look at the important aspects that you must keep in mind while opting for one...      Gone are the days when a leading criterion for choosing an employer was the type of pension plan that came with your salary package. Today, more important issues like matching of skill sets to job requirements, scope for personal and financial growth, etc. have come to the forefront. However, this has left individuals with the responsibility of financially planning for their golden years. And it's all for the best as there are a variety of pension plans available in the market to suit different individuals and their specific needs. WHAT ARE PENSION PLANS?     In a pension plan, you are required to pay premiums for a certain number of years and once you reach the retirement age, the insurer returns a lump sum amount that can be then used to purchase an annuity or stream of income for the rest of your life....
Read more

ICICI Prudential Balanced Fund

 ICICI Prudential Balanced Fund scheme seeks to generate long-term capital appreciation and current income by investing in a portfolio that is investing in equities and related securities as well as fixed income and money market securities. The approximate allocation to equity would be in the range of 60-80 per cent with a minimum of 51 per cent, and the approximate debt allocation is 40-49 per cent, with a minimum of 20 per cent. An impressive show in the last couple of years has propelled this fund from a three-star to a four-star rating. The fund has traditionally featured a high equity allocation, hovering at well over 70 per cent, which is higher than the allocations of the peers. But in the last one year, the allocation has been moderated from 78-79 per cent levels to 66-67 per cent of the portfolio. ICICI Prudential Balanced Fund appears to practise some degree of tactical allocation based on market valuations. Within equities, well over two-thirds of the allocation is parked i...
Read more

Tax Planning: Income tax and Section 80C

In order to encourage savings, the government gives tax breaks on certain financial products under Section 80C of the Income Tax Act. Investments made under such schemes are referred to as 80C investments. Under this section, you can invest a maximum of Rs l lakh and if you are in the highest tax bracket of 30%, you save a tax of Rs 30,000. The various investment options under this section include:   Provident Fund (PF) & Voluntary Provident Fund (VPF) Provident Fund is deducted directly from your salary by your employer. The deducted amount goes into a retirement account along with your employer's contribution. While employer's contribution is exempt from tax, your contribution (i.e., employee's contribution) is counted towards section 80C investments. You can also contribute additional amount through voluntary contributions (VPF). The current rate of interest is 8.5% per annum and interest earned is tax-free. Public Provident Fund (PPF) An account can be opened wi...
Read more

Fortis Mutual Fund

Fortis Mutual Fund, a relatively new player, it is still to prove its case and define its position in the industry. In September 2004, it came onto the scene with a bang - three debt schemes, one MIP and one diversified equity scheme. And investors flocked to it. Going by the standards at that time, it had a great start in terms of garnering money. Mopping up over Rs 2,000 crore in five schemes was not bad at all. The fund house has not been too successful in the equity arena, in terms of assets. Though it has seven equity schemes, it is debt and cash funds that corner the major portion of the assets. Most of the schemes are pretty new, and the two that have been around for a while have a 3-star rating each. The last two were Fortis Sustainable Development (April 2007), which received a rather poor response, and Fortis China India (October 2007). Fortis Flexi Debt has been one of the better performing funds, after a dismal performance in 2005. It currently has a 5-star rating. None ...
Read more
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now