How to use HUF for as a tax planning tool

Posted Date : 28-Aug-2012 , 09:13:58 am | Posted By CASANSAAR print

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"If you are paying too much tax and all possible deductions have been availed of, the only way to bring down the tax liability is by starting a Hindu Undivided Family (HUF).

Who can form HUF?

Any Hindu, Sikh, Jain or Buddhist man can form an HUF, provided he is married. In fact, an HUF is automatically constituted when a couple exchanges wedding vows. Still, there are a few simple formalities to be completed for the HUF to function as a legal entity .

The first step is to form a corpus for the HUF. This can be any capital asset (property, gold, jewellery, securities, deposits) or cash. This is not as easy as it may sound. You can't transfer just any asset to your family 'hotchpot'. Any personal funds or property given by an individual to the HUF will lead to clubbing provisions under Section 64 (2) of the Income Tax Act. This means the income from these assets will be treated as that of the individual, thus defeating the very purpose for which the HUF was established.

A husband and wife can form an HUF but a wife can only be a member, not a co-parcener. Therefore, the HUF income will not be assessed separately. A member has equal rights but only a co-parcener can demand the partition of the HUF. "Only the birth of a child will give the unit the status of an HUF for tax purposes,.

The HUF can be formed with money received as gifts from relatives. But there's again a tax implication here. While there is no tax on gifts received by an individual from specified blood relatives, the HUF does not enjoy this exemption. "The HUF is not an individual, so it has no relatives. Any money it gets will be treated as a gift from a stranger. If the value of the assets received as gifts in a year exceeds 50,000, it will be deemed as income of the HUF and taxed accordingly," .

Even so, an HUF can safely receive gifts of up to 1.8 lakh in a year without incurring any tax liability because of the basic exemption available to it. In fact, if the HUF invests 1.2 lakh in specified tax-saving instruments under Section 80C and 80CCF, it can receive assets worth up to 3 lakh a year without having to pay a paisa as tax. The best way to avoid the tax tangle is to form the HUF corpus with assets received as part of a will.

But here too there are certain conditions to be met. If the property is inherited by the individual, transferring it to the HUF will again lead to clubbing. "A person can give property and other assets to his son's HUF but it should be clearly specified that the asset is for setting up the HUF

One can also start the HUF with funds received on the dissolution (or full partition) of a larger HUF. If the karta wants to divide the HUF property between the co-parceners, he can transfer the fund to a newly formed HUF. If the ancestral property is sold, the proceeds received can also be transferred to the HUF.

Joining the HUF

There's no need to fill an application form or submit KYC documents for joining an HUF. All lineal descendants of the karta, their spouses and children automatically become members of his family. Wives join the HUF as members, while children join on birth as coparceners. "Even the unborn child of a member or co-parcener has an equal share in the HUF,"

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