Question: What are the benefits of forming an HUF for tax savings? How can an HUF be formed/ created?

Answer given by Dr. Suresh Surana, Founder, RSM India: Forming a Hindu Undivided Family (HUF) in India can offer several benefits for tax savings. Here are some of the key advantages:

Additional Tax Deductions and Exemptions:

HUF is treated as a separate tax entity under the Income Tax Act, allowing it to avail of tax exemptions and deductions similar to those available to individuals. This means that HUF can claim deductions under various sections such as 80C (for investments in instruments like PPF, ELSS, etc.), 80D (for health insurance premiums), and others, thereby reducing its taxable income.

Property Ownership and Transfer:

HUF allows for the consolidation of family assets and properties under a single entity, making it easier to manage and transfer wealth within the family. Property transferred to HUF can be jointly owned by all members, leading to potential tax benefits and succession planning advantages.

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Succession Planning and Wealth Transfer:

HUF provides a structured framework for succession planning and intergenerational wealth transfer within the family. Assets held by HUF can be passed down to future generations through succession rules, minimizing the tax implications and ensuring continuity of family wealth.

Investment and Financial Planning:

HUF can invest in a wide range of financial instruments and assets, including stocks, mutual funds, real estate, and more. By diversifying investments and leveraging tax-saving opportunities, an HUF can enhance its overall financial planning and wealth accumulation strategies.

An HUF can be formed by a married couple or members of a joint family belonging to Hindu, Jain, Buddhist and Sikh communities. Members belonging to Muslim, Christian or any other communities would not be eligible to form an HUF since HUF is created in accordance with Hindu Law as follows:

(i) Written Agreement/ Formation of a Deed

Creation of a HUF Deed is not mandatory as per law, however, it is recommendable that a written agreement should be entered into as it would aid in applying for PAN and other legal compliances, including opening of bank account. HUF Deed is a written formal legal document providing for the HUF family structure such as the Karta (eldest member of the family), co-parceners/ members of the family. Additions to the members of the HUF would be made by way of birth, adoption or marriage. Such deed may also put forth the powers vested with the Karta to enter into transactions and manage the affairs of such HUF, objective or intention behind forming such HUF etc.

(ii) Allocation of Capital

The corpus of any HUF is generally formed by ancestral property, gifts from relatives, will, etc. Proper planning needs to be made with respect to the corpus of the HUF as once any property of the member is transferred in the name of the HUF, each of the members of the HUF would have an equal right in such property.

(iii) Application for a PAN

As HUF would have a PAN separate from its members, it is necessary to apply for a PAN for such HUF. Having a PAN aids in opening a bank account as well as filing income tax returns of the HUF. Moreover, PAN is a mandatory requirement for entering into certain financial transactions and non-availability of the same may entail penal consequences. Hence, an application for PAN for the HUF should be made.

(iv) Opening of a Bank Account

Once the PAN has been allotted, a bank account can be opened in the name of the HUF wherein the transactions pertaining to the HUF may be carried out. It needs to be ensured that such bank account is exclusively maintained for HUF transactions only.

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Disclaimer: The views and facts shared above are those of the expert. They do not reflect the views of financialexpress.com