Forming a Hindu Undivided Family (HUF) is a good option for planning your inheritance. Through this, you can save a lot of tax. Also, the security of property will also be ensured. Keep in mind…if you have used HUF to save tax in the wrong way, then you will not get tax exemption.
Amit Mishra of Kanpur, who retired from a government job, gets a pension. He has two married sons. Both are employed. The family is earning a good amount from ancestral property and business. All the members file Income Tax Returns (ITR) separately. Amit was advised by a Chartered Accountant (CA) that if he forms a Hindu Undivided Family (HUF), the entire family can save a lot of tax. Apart from this, there will be many other benefits as well.
Under the Hindu Succession Act-1956, HUF is considered a legal entity. In the Income Tax Act-1961, HUF is considered a separate entity within the family. Just as a family member gets the benefit of exemption and deduction under various sections of Income Tax, HUF also gets the same benefit.
This is how HUF is formed
A broad definition of HUF has been defined in the Income Tax Act. Under this, people who are living in India and are not Christians, Parsis, Muslims and Jews can form their own HUF. This means that Sikhs and Jains can also form HUF. HUF is automatically formed after marriage in a Hindu family, but to take advantage of this, you will have to register HUF. For this, a declaration form will have to be given. Through this, a PAN card will have to be made from the Income Tax Department. As soon as the PAN card is made, your HUF will be formed. Through the PAN of HUF, you can open a bank account. You can invest and spend the income of HUF anywhere.
When and how will the exemption be available?
HUF will get exemption only on its income. If any member wants to get tax exemption by putting his income in HUF, this will not happen. Let us understand how to save tax through HUF with the example of Amit.
Suppose, Amit’s annual income from pension and other private sources is Rs 10 lakh. He earns Rs 5 lakh from family business and rent of ancestral property. In this way, Amit’s total annual income will be Rs 15 lakh, which will put him in the upper tax slab.
Amit can include the income from inheritance in HUF. According to the old tax system, income up to Rs 2.5 lakh is tax free. The tax of Rs 12,500 on the remaining Rs 2.5 lakh will be available as rebate under section 87A.
In this way, Amit can make his income of Rs 5 lakh tax free by filing return on behalf of HUF.
This is how it works
In a HUF, the eldest person in the family is the karta, i.e. the manager. As per the rules, a woman in the family cannot create a HUF in her own name. She can only become the karta of her father’s HUF. If Amit creates a HUF, he will be its head as he is the seniormost in the family. Family members who are related by blood will be the co-parceners, i.e. joint heirs, of the HUF. People who join after marriage are called members. In this way, both daughters-in-law of Amit will be members of the HUF. When a child is born in the family, he becomes a member of the HUF.
Under the rules, you cannot include your personal property in HUF. Property inherited through a will or trust or any other means is included in HUF. The income from this property will be considered as the income of HUF.
A co-partner can demand his share from the HUF, but a member does not have this right. If the property is divided, the member will get his share.
Know…who should form HUF
Dr. Deepak Jain, Founder Director of NextGen Estate Planning Solutions, says that HUF plays an important role in estate planning. It has many benefits, but income tax exemption is its biggest benefit. HUF will get the benefit of all the exemptions and deductions that an individual taxpayer gets. Families who have income from inherited property or business can form HUF to reduce their tax liabilities.
The best way is to form a HUF as soon as you get married. Include the gifts received during marriage and property received from parents in it.
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