HUF and Financial Planning
As per Hindu Law, a Hindu Undivided Family (HUF) is a legal term related to the Hindu Marriage Act and consists of a family consisting of all lineal male descendants of a common ancestor and includes their wives and unmarried daughters. Hindu Undivided Family (HUF) has been granted the status of an independent tax entity. Thus, an HUF has assumed a useful role in personal financial planning.
Let us first understand the structure of a HUF. A HUF consists of “Karta” , “Coparcener” and “Members”. A Karta is the senior most male member of the family. Only the Karta has the right to manage the property and business of the HUF. He can enter into contract on behalf of the HUF and bind all the members to the extent of their share in the property / business. If Karta of the family passes away, his wife cannot become the Karta. His eldest son will take his place. If the chooses not to become the next Karta, he can give up his right and the next son in line can take his place.
Coparceners are all the other male members of the family. A Hindu coparcenary includes the sons, grandsons and great-grandsons of the holder of the joint family property. By virtue of their birth, they acquire an interest in the property. All the coparceners and Karta may authorise any one or more adult coparceners to manage the business. Such a person is known as “Manager”.
Female Coparceners: The Hindu Succession (Amendment) Act 2005 has given equal rights to male and female in the matters of inheritance as a result a daughter also acquires status of Coparcener. Some experts also believe that in absence of any male member or only/all male member(s) is/are minor, a female member can become Karta / manager of HUF after this act. The female members are also called members.
No Formal action is required to form a HUF. It automatically comes as soon as you are married. However, it is advisable to register HUF by furnishing a creation deed. But do remember that you cannot mention the property and assets under HUF in your Will.
Besides other things a HUF is useful in saving taxes. Under the Income Tax Act, a HUF is treated as a separate entity for the purpose of assessment. The income of a joint Hindu family can be assessed as the income of a HUF only if there is a coparcenary. and there should be a joint family ancestral property. HUF is regarded as a separate entity and can earn income from the following sources:
1.. Income from House Property
2.. Profits from business or profession
3.. Capital gains
4.. Income from other sources
Tax structure of a HUF is similar to an individual tax payer and thus is also eligible for the benefits u/s 80C and other such exemptions and benefits. The ways you can save taxes with HUF are:
Saving tax by getting gifts
Take gifts in the name of HUF. That way the gift will be treated as income of HUF and taxed separately. You can take Rs 50,000 as gift from strangers and dont have to pat tax on this Rs. 50,000. But actually it can go up to Rs 2.0 lacs which is the tax free limit of total income, You can claim the benefits of section 80C and thus you can have a total income of Rs. 3,00,000 and not pay any tax in HUF.
Assign ancestral properties and wealth to HUF and invest it
If your family is going to receive an ancestral property or any wealth, then it’s better to transfer it to your HUF so that whatever earnings happen in future in form of rental income or capital appreciation of assets becomes income of HUF and taxed in its own hands. This is yet another way to reduce your total tax liabilities.
Invest and make payments with HUF income
As HUF enjoys separate tax benefit and exemptions under sec 80C, 80D, 80G, 80L, 54, 54F, invest in life and health insurance for family, PPF, ELSS and other instruments from the income of HUF.
Pay Remuneration to Karta
One way to reduce tax is to pay remuneration to Karta and the members for their services rendered to the family business. This remuneration would be allowed as a deduction from the total income of the HUF.
As per Wealth Tax Act 1957, a HUF enjoys a distinct liability and thus have a separate exemption under wealth tax liability and other benefits u/s 5 of the wealth tax act.