Tax Talk: Know the benefits of creating HUF

By Sandeep Kanoi

Hindu Undivided Family (HUF) is treated as a ‘person’ under Section 2(31) of Income-tax (I-T) Act. HUF is a separate entity for the purpose of assessment under the Act. Under Hindu Law, an HUF is a family which consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. An HUF cannot be created under a contract, it is created automatically in Hindu, Jain and Sikh families.

Key points in creation of HUF

HUF is a separate entity for the purpose of income tax return.
The same tax slabs are applicable to HUF as to individual assessee.
You cannot transfer your own assets/money into HUF.
If you have ancestral property and earning some income from this property, then it is better to transfer this asset to HUF and save tax up to exemption limit applicable to individual.
You can transfer money received on sale of ancestral property into your HUF.
The income from property of HUF can be further invested in instruments such as shares, mutual funds, etc. ,and will be assessed under HUF.
Existence of property or multiple members is not a pre-requisite to create HUF. A family which does not own any property may still have the character of Hindu joint family. This jointness is understood in terms of faith and food. This is because as a Hindu is born as a member of the joint family.
Any gifts received by members of HUF can be treated as assets of HUF.
The HUF is taxable as separate person under income tax hence one can save tax under basic exemption of Rs 2.5 lakh. HUF will also gain from the tax slab structure of computing income tax.
Section 80C deduction up to Rs 1.50 lakh is also available.
An HUF is liable to pay Alternate Minimum Tax if the tax payable is less than 18.5% (including cess and surcharge) of “Adjusted Total Income” subject to prescribed conditions.
The following incomes are not taxed as income of HUF: If a member has converted or transferred without adequate considerationhis self-acquired property into join family property, income from such property is not taxable in hands of the family. Income of impartible estate (though it belongs to family) is taxable in the hands of holder of estate and not in hands of HUF. Personal income of the members cannot be treated as income of HUF. “Stridhan” is absolute property of a woman, hence income arising from it is not taxable as income of HUF. Income from individual property of daughter is not taxable in hands of HUF even if such property is vested into HUF by daughter.

The writer is a chartered accountant
Source: Tax Guru