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HUF – A way to save Income Tax (II)
Hindu Undivided Family (HUF) is an altogether separate & distinct tax entity under the Income-tax Act, 1961. It enjoys the basic exemption limit as is available to individual assessee. It is also eligible for deductions under various sections of chapter VI-A of the Income Tax Act-1961 like deduction u/s 80C, 80D, 80DD, 80DDB, 80G etc & can also claim deduction for interest on self occupied house property u/s 24 up to Rs. 2,00,000/- in a year. In short, HUF is a wonderful tool for tax planning & can help taxpayer to save their taxes in a legal manner. In the previous column-Part I, we have discussed the tax benefit of having an HUF as a taxable entity. Now, let us get familiar with other aspects of it.
- The male members in a family are called coparceners, while the females are referred to as just members. The difference between the two is that any of the coparceners can demand partition of the HUF. However, The Hindu Succession (Amendment) Act, 2005 w.e.f 09.09.2005 has removed this gender discrimination by giving equal rights to daughters, same as sons. The daughters become the coparceners of their father’s families on birth in the same manner as sons and have same rights as sons have in the family properties.
- The head of the HUF is called the Karta, which is normally the senior-most male member of the family acting as manager. Normally, membership of coparcenary is a pre-qualification for being the karta of the family. After the 2005 amendment in succession Act-2005, even daughter are eligible to be the recognized as Karta of HUF.
- Property obtained by daughter from joint family property would be her absolute property. Any income therefrom is chargeable to tax in her hands in the individual status only. This will also apply to any legal heir obtaining property in the capacity of a descendent.
- Gift of HUF Property to any one or more of the coparceners or members of the family have been held to be void by most of the High Courts in the Country. So, the Karta of an HUF cannot gift or alienate HUF property. However, Gift of HUF Property within reasonable limits to daughter, daughter-in-law or even to a son out of natural love and affection or to discharge moral obligation or for pious purpose in discharge of indispensable duty or to the daughter at the time of marriage etc., are accepted as valid gift.
- Ancestral Property: Ancestral property may be defined as the property which a man inherits from any of his three immediate male ancestors, i.e. his father, grandfather and great grandfather. Therefore, property inherited from any other relation is not treated as ancestral property.
How to Form an HUF?
An HUF cannot be created by contract. It is automatically created at the time of marriage. An HUF is nothing but a family unit & one person cannot be considered as family. So, single person cannot form HUF.
From taxation point, the relevant question is, how and what income could be there in HUF? The question is all the more relevant for men who are self made person or where the family has not inherited any ancestral property.
It may be noted that income which is earned by using HUF funds or property only is taxable as HUF income. Income that arises on the investment of HUF funds (e.g. interest earned on loans given by a HUF) or out of the utilization of HUF assets (e.g. rent of HUF property) would be regarded as HUF income. HUF can earn income from all sources except salary. It can invest the initial corpus as well as gifts received to start a business and earn profits or earn capital gains. Investments can be made from HUF’s income. Any returns from these investments are taxable in the hands of the HUF.
In short, HUF fund (capital or nucleus) is normally an important impetus for HUF income. Following are the most common sources which results in creation of HUF assets by providing the required nucleus to the HUF:
Money received as gifts from relatives for the benefit of HUF can be a nucleus for it . While there is no tax on gifts received by individual from specified relatives. This is not so in the case of HUF. If HUF received gift exceeding Rs. 50,000/- in a year from non-members, it will be taxable as income.
Blending or vetting of individual property with the family Hotchpot. However, there is a rider from taxation angle. If a member has converted or transferred his self-acquired property into join family property without adequate consideration. Income from such property is not taxable in hands of the family but would be taxable in the hands of such member only due to specific clubbing provision in the I.T. Act.
Inheritance through a specific bequest under a Will could be a source of capital for HUF. Intention of bequest being for the family should be in clear terms in the will.
Partition of a larger Hindu Undivided Family could provide the capital for smaller new HUF.
After having some capital, it can apply for permanent account number (PAN). And opening a bank account in the name of the HUF. With above nucleus, HUF can have its own income, separate from its members & can file tax returns independently.
Needless to say, HUF is a powerful tax vehicle & its recognition as a distinct unit for tax policy u/s 2(31) of the Income Tax Act-1961 provides ample opportunity to save tax.
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