Income Tax Planning Tips for HUF in India
Hindu Undivided Family – Save more tax by creating a HUF in India
Do you know how you can use Hindu Undivided Family (HUF) to reduce your overall tax liability? In this article we will give you tips and real life examples on how you can use HUF to save taxes legally. But first let’s understand what is HUF:
What is HUF?
A false impression amongst people is that HUF needs to be created whereas the truth is that an HUF comes automatically into existence at the time of marriage of an Individual and no formal action needs to be taken for the same. However, in case a person who wants to specifically register for creating an HUF, he can furnish a creation deed on a stamp paper. As HUF is governed by the Hindu Law and not by the Income Tax Act, individuals belonging to other religions are not allowed to form HUF except Jain’s and Sikhs who can create HUF even though they are not governed by the Hindu Law. Two entities are extremely important for you to know in HUF are the coparceners and members.
Coparcener is someone who has the right to demand the share of the property of family; coparceners are generally the Karta (Main decision maker of family, usually the Father , but Manmohan Singh had 5 years ago brought an amendement which stated that Females can become Karta & there can be an all female HUF as well), then sons & daughters, grandsons and great grandsons in order of their first right. Wife of the Karta is not a coparcener or even spouse are not coparceners and hence can’t demand/ ask for any share in HUF, they are just merely members of HUF.
Tips to Plan and Save Tax for HUF
Saving tax by getting gifts
One way of saving tax is by transferring the money received from strangers or family are taken as gifts in name of HUF. So if Sanyam starts his HUF called “Sanyam HUF” and he is getting some gifts from his father, friends or anyone else, he can ask them to give it to “Sanyam HUF” and not Sanyam itself. That way the gift will be treated as income/asset of HUF and taxed separately. One important point here, if some stranger is giving gift to HUF, there is a limit of Rs 50,000 on which no tax has to be paid, but actually it can go up to Rs 1.8 lacs as the taxable limit is that much, and if one also has to do investments of 1lac (total 80c limit), then one can afford to receive up to Rs 2.8 lacs of gifts in a financial year and there will be no tax liability at all.
Assign ancestral properties and wealth to HUF and invest it
If family is going to receive an ancestral property or any wealth, then it’s better to transfer it on HUF name so that whatever earnings happen in future in form of rental income or capital appreciation of assets becomes income of HUF itself and taxed in its own hands. That way the total tax liability of family can be minimized.
Use HUF income for expenses and Insurance for Family
As HUF enjoys separate tax benefit under sec 80C, one can use the income of HUF for buying Life & health insurance for family and the permissible deductions can be availed for tax purpose in hands of HUF, so if the total premiums for insurance requirement of family is Rs 50,000 per year, then It can go from HUF income and also the individual can exhaust his 1 lac limit separately via PPF, ELSS and other tax instruments. Also family day to day expenses can be used from HUF income and hence it will leave other members with more disposable income which one can use to service higher EMI’s if required.
HUF family can also reduce the tax liability by investing money in specified saving schemes mentioned under section 80C of income tax act or by spending money for certain personal purposes of Karta or members and claim deduction as provided under section 80 of income tax act.
Claim reasonable salary etc. to Karta as expenses:
HUF should allow reasonable salary etc. to Karta in respect of his services in the conduct of business of the family.
However, such remuneration must be under a valid agreement which is bonafide in the interest of the business of the family. Such payment must be reasonable and genuine. In Jugal Kishore Baldeo Sahai vs. CIT (1967) 63 ITR 238(SC), the honorable Supreme court laid down the following conditions for allowability of remuneration to Karta.
- The payment of remuneration must be under a valid agreement.
- The agreement must be bonafide and by or on behalf of all the members of the family.
- The agreement must be in the interest of or expedient for the business of the family.
- The payment of remuneration must be genuine and not excessive.
- The payment must be on the grounds of commercial expedient, and it must be laid out wholly and exclusively for the purpose of the business of the family.
It is important to note that the agreement for payment of salary to the Karta should be between the Karta and other members of the family. Such an agreement not necessary required to be in writing and can be inferred from the conduct of the parties [CIT vs. P. Nirmal Rao (1991) 188 ITR 631 (Orissa), the Orissa High court held that in the absence of any prohibition in any law, if the member of HUF decide to pay more remuneration to Karta who may be managing its business, such remuneration is deductible while computing the income of such business.
However, unreasonable and excessive remuneration can be disallowed by the assessing officer under section 40A (2) of income tax act.
Employ family members in business:
The members of family can also be employed in the business because reasonable remuneration to members for taking part in the business of HUF is also allowed as deduction while calculating business income of the HUF.
It is important to note that the remuneration received by the Karta or any other members shall be taxable in the hands as their personal income.
Borrow money from Karta or members:
HUF can borrow money from Karta or other family members of HUF as reasonable rate of interest and can claim deduction of such interest against its business income.