Tax planning by creating HUF

1. Under the Income Tax Act, an HUF is a separate entity for the purpose of income tax return.

2. The same tax slabs are applicable to HUF as to individual assessee.

3. You cannot transfer your own assets/money into HUF.

4. 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.

5. You can transfer the money received on sale of ancestral property /assets into your HUF.

6. The income from property of HUF can be further invested in instruments such as shares, mutual funds, etc. and will be assessed under HUF.

7. 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.

8. Any gifts received by the members of HUF (birthday, marriage, etc.) can be treated as assets of HUF.

9. The HUF is taxable as separate person under income tax hence one can save tax from basic exemption of Rs. 2.5 lakh. HUF will also gain from the tax slab structure of computing income tax.

10. Apart from basic exemption of Rs. 2.50 lakh, section 80C deduction up to Rs. 1.50 lakh is also available.

11. For example, if you are in 30% tax bracket, then approx tax saving by creating an HUF will be as follows:
• Basic exemption up to Rs. 2,50,000 = nil
• Rs. 2,50,000-5,00,000 @10% = Rs. 25,000
• Rs. 5,00,000-10,00,000 @20% = Rs. 1,00,000
• 80C deductions Rs. 1,50,000
• Therefore total tax payable for HUF on income of Rs. 6,50,000 is only Rs.
25,000.
• If this income of Rs. 6,50,000 is taxed in individual hand @ 30% tax due is
Rs. 1,95,000.
• Hence, you can save a total of Rs. 1,70,000 by creating an HUF and
transferring ancestral property income and other income under HUF.

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Gift from HUF to member of HUF

I am member of HUF and HUF gives gift to me. Is the amount exempt from income tax under section 56(2)(vii) or under 10(2) ?

The Finance Act, 2012 has widened the definition of relative under Section 56(2)(vii) by providing that in case of a Hindu Undivided Family, any member thereof shall be treated as a relative. Therefore, an HUF can now make or receive gifts, to or from any of its members, without attracting any liability for income-tax. It is important to note that this amendment has been made retrospectively with effect from 1st October, 2009. Also remember that one of the important exceptions provided, in regard to taxing gifts as income, is in respect of sums received by any individual from his/her relative out of natural love and affection. For this purpose, the term ‘relative’ has been defined to include the individual’s spouse, brother or sister of the individual or spouse, brother or sister of either of the parents of the individual, any lineal ascendant or descendant of the individual or spouse and finally the spouse of any of the above-referred persons. Thus, apart from the closest members of the immediate family such as parents, grandparents, children, grandchildren, brothers and sisters, even uncles, aunties and in-laws and the HUF have been empowered to give tax free gifts without any monetary limits. However, cousins, nephews and nieces have been kept out of the list.

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