Post on 11th Dec 2016 by Pradeep Jain, Director, Paperpink.
Since last couple of months, I have come across to various families who are paying very high rate of income tax on their investments. These taxes are being paid by the earning member of the family at the rate of income tax applicable to him. This led me to write this blog.
HUF can play a very important role in tax saving, especially on investments. However most of the people are not doing it even if they know about it. People hesitate to form HUF, somewhat due to lack of knowledge about the process of forming HUF and somewhat due to misconceptions.
When investments are being done for the better future of the family then why shall the return on investment be taxed in the hand of high earner of the family (This attract higher rate of income tax)
I have covered most of the points related to HUF in only 5 bucket as below:
WHO CAN FORM HUF:
A married couple can form HUF even if they do not have any kid. I belief this is very simple statement and does not require any further explanation.
There are some facts and laws on the basis of which we can say that HUF can be formed by Even Jain, Sikh and Buddhist families.
- Article 25 of the constitution of india
wherein Explanation II provides as under:
In sub-clause (b) of clause (2), the reference to Hindus shall be construed as including a reference to persons professing the Sikh, Jaina or Buddhist religion, and the reference to Hindu religious institutions shall be construed accordingly
- B) Hindu Succession Act 1956, This Act applies–
(a) to any person, who is a Hindu by religion in any of its forms or developments including a Virashaiva, a Lingayat or a follower of the Brahmo, Parathana or Arya Samaj.
(b) to any person who is Buddhist, Jaina or Sikh by religion
- C) A case law in Supreme Court – Champa Kumari Singhi83 ITR 720 SC
HOW TO FORM HUF:
1. Make an affidavit, by paying stamp duty as per Stamp Act of the state, containing the information of Karta, Member and Coparceners of HUF
a) Karta – Senior Male Member of the family. In case of widow, senior female can also be the Karta of HUF.
b)Coparceners – Male or Female child by birth become the Coparceners in HUF.
c) Member – Adopted male child or wife is called member of the HUF
2. Apply for PAN card on the basis of above affidavit.
3. Open a Bank account for Transactions.
HOW TO MAKE CAPITAL OR CORPUS OF HUF:
There are various ways of making capital in the HUF as mentioned below:
- Take Loans – It is not recommended to take interest free loan to avoid clubbing provisions;
- Take Gifts – Aggregate amount of gift shall not be greater than INR 50,000/- else it will be taxable. However, if HUF have income below taxable limit in a financial year then it can take loan up to income tax exemption limit (INR 250,000/- for FY 2016-17) as it will not require to pay tax even if gift are treated as income in the hand of HUF. If any higher amount is taken as gift then tax shall be paid under the head “Income from other Sources”.
- Inheritance – Property can be received by way of inheritance also in HUF.
- Income – Capital can be created by receiving income from business, Commission or Investment.
ADVANTAGE AND DISADVANTAGE OF MAKING HUF:
- As HUF is treated a separate entity in the Income Tax, It can save a huge amount of tax due to additional slab of income tax.
- Various expenditures like family Medical Insurance, Life Insurance, Common household expenditure can be incurred in HUF which will save capital in the hand of individuals who are in higher bracket of tax.
- Various Investments can be made in the name of HUF which can help in enhancing tax free rate eg. Investment in Mutual Funds etc.
- It is very easy to form an HUF, but it is very difficult to break it.
- Asset of HUF cannot be the part of any will. All the members and coparceners of the HUF have equal rights on the assets and corpus of HUF.
It is a very important tool of tax saving under income tax act. Somehow people use it for tax evasion also but we are not discussing here unethical ways.
It is recommended to make HUF and investments shall be made in the name of HUF to save tax.
I believe this article will help you guys in understanding the importance of HUF.
Team paperpink is continuously working on covering important topics in simple ways which can be of immense use.
CA Pradeep Jain – Pradeep@paperpink.in
CA Kanchan Jain – email@example.com