Hindu Undivided Family -Great way to save taxes

HUF or Hindu Undivided Family is defined under the Hindu Law as a family that consists of all persons lineally descended from a common ancestor, including wives and unmarried daughters. It is a separate entity in the eyes of law. It can own assets and generate income from rent, profession and business. All income that arises on the investment of the HUF's funds and utilization of its assets is separately assessed and taxed. As the name suggests only Hindus governed by the Hindu law can create such an entity. Though Jain and Sikh families are not governed by the Hindu law; they can still be treated as a HUF. Unfortunately persons of other religion such as Muslims, Christians or Parsis do not have such a facility .

The oldest male member of the Family is the Karta while other male members are called co-parceners. The female members are simply called members. It is the Karta whose name the HUF carries and it is he who signs documents on behalf of the HUF entity. For Example if there is a family of Pankaj Gupta, where all members are adults, consisting of him, his son Aditya, daughter Anjali and wife Amrita the HUF will be called 'Pankaj Gupta HUF'. His son is a co-parcener and daughter and wife are members.

How to set up an HUF - Gift from mother or father or relatives of male member of the family can be used to create the initial asset for HUF. In some cases, the father may also pass on his individual property to the children as HUF property through a specific declaration in a Will. Partition of a HUF can also result in transfer of assets to the HUFs in the name of the male members of the family. So as in our example partition of Pankaj Gupta HUF can lead to creation of Aditya Gupta HUF.

The Tax Benefit- Income generated by assets held by HUF is exempt from tax up to the same exemption limits as applicable to individuals. Besides, such income would also be eligible to a further income tax deduction or exemption of Rs. 1 lakh under Section 80C in respect of LIC premium, ELSS, PPF contribution, NSC, etc. Mr. Pankaj of our example falls in the highest tax bracket. He has just created his HUF and hence there are no assets currently .His father gifts him Rs.50,000 in the form of 8 % RBI Bonds. For Mr.Gupta the interest on these bonds will be taxed at 30%. His net returns from the bond will be a low 5.6 % post tax. Instead if he accepts the bond as a gift to his HUF he may well pay zero tax on the interest income as the full Rs.4,000 he earns on the bond will be well within the 1.5 lakh exemptions limit for income tax.

Under Wealth Tax Act, 1957 too, separate exemptions are available for individual property and HUF property. Thus persons having immovable property and jewellery and motorcars under HUF status stand to gain from the extra exemption under Wealth Tax Act .

Also as mentioned above where a father transfers property by Will to the members of his family for the specific purpose of the HUF of his son or sons, it can result into a good deal of income tax and wealth tax saving for the persons inheriting such property.

A HUF can be a powerful tool to save taxes and build long tem assets for the benefit of family members. A tax consultant can easily help you create a HUF and build assets in it in a completely legal manner. Consider it.