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How can HUF helps Individual to save Income TAX

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Introduction about Hindu Undivided Family (HUF)-

An HUF is recognized as a separate assessable entity under the Act. HUF may be Resident or a Non Resident in India, it depends upon where the Karta of the HUF is residing. HUF consists of common ancestor and all of his lineal descendants, including their wives and unmarried daughters. Daughters are considered a member of their father’s HUF until they get married. Wherein the male members are referred to as coparceners and the female members are referred to as members.

The senior most male member in the family is normally referred to as Karta, who manages the affairs of the family. The Karta of the family generally manages the family property, which is regarded as the joint property of all the coparceners.

In relation to HUF property, a coparcener is a person who acquires a right in the ancestral property by birth and a person who has a right to demand partition in the HUF property. Only male members were called coparceners. Where by even daughters have been included within the term coparceners and all references to son shall equally apply to daughters also.

Buddhists, Hindu’s, Jain’s and Sikhs can form HUF.

 

How to create HUF Capital-

  • Gift received at the time of marriage of any member (except marriage of daughter) of the HUF. There has no limit.
  • Gift value from non relatives does not exceed Rs. 50,000 in any financial year.
  • No limit on gifts received from members of HUF, but the income generated from these funds would get clubbed in the hands of member who give the gift.
  • Ancestral property belongs to the whole family. It can be transferred to create capital of HUF.
 

Taxability under HUF-

  • The HUF can claim deductions under section 80.
  • The HUF can take health insurance policy on the life of its members and claim their deduction under income tax.
  • Income earned from the investments made from the HUF income is taxable in the hands of the HUF.
  • HUF can pay salary to its members if they are contributing to its functioning and the work of the joint Hindu family business. This salary is an expense and can be deducted from the income.
  • HUF is taxed at the same rates as the individuals.
 

Documents Required  

  • HUF Deed – It should have a legal deed. It is a written on a stamp paper which should contain the details of its Karta, coparceners and its business. In HUF deed a declaration is provided by all the members about the name of the Karta and that he would have the authority of the accounts and would hold the right to govern all the transactions of the HUF accounts on behalf of the members.
  • Permanent Account Number – HUF should have a separate PAN number.
  • Bank Account- HUF should have its bank account which be used for making all investments/expenses of HUF. While opening the bank account, all papers should be signed and rubber stamped by the Karta of the HUF. Karta has the right to operate bank account on behalf of the members.
 

Benefits for creation of HUF –

  • The HUF has its own Permanent Account Number (PAN) and then a separate income tax return is filed.
  • The creation of Hindu Undivided Family helps the tax payers to save their taxes in a legal manner.
 

For Example-

If a person Mr. X has income of Rs. 6,00,000 per annum and his wife Mrs. X has income of Rs. 5,00,000 per annum. They also have rental income from his ancestral property which is 5,00,000 per annum.

Taxability under financial year 2017-18 is as under-

Before creation of HUF- Taxability including cess is as under-

If rental income is taxable in hands of Mr. X -

      Total Income =Rs. 6,00,000+3,50,000 (5,00,000-30% of Repair) = 9,50,000

      Tax liability on Rs. 9,50,000 comes to Rs. 1,05,575 (A)

Income of Mrs. X as under-

     Total income = Rs. 5,00,000

     Tax liablity on Rs. 5,00,000 comes to Rs. 12,875 (B)

Total Tax paid  (A+B) = 1,05,575+12,875=1,18,450

After creation of HUF- Taxability including cess is as under-

  • X has to pay tax on Rs. 6,00,000 i.e. Rs. 33,475
  • Mrs. X has to pay tax on Rs. 5,00,000 i.e. Rs. 12,875
  • HUF has to pay tax on Rs. 3,50,000 (5,00,000-30% of Repair) i.e. Rs. 5,150
  • Total Tax paid = 33,475+12,875+5,150=51,500

Tax saved after creation of HUF is Rs. 66,950/- (1,18,450 - 51,500)

 

Assessment of HUF-

Income can be assessed under HUF if the following conditions are satisfied:

  1. There should be a coparcener ship. It is to keep in mind that once a joint family income is assessed as that of HUF, it continues to be assessed as such in subsequent assessment years till partition is claimed by coparceners.
  2. There should be a joint family property which consists of ancestral property i.e. Ancestral property means the property which a man inherits from any of his three immediate male ancestors, i.e. his father, grandfather and great grandfather. If the property inherited from any other relation is not treated as ancestral property.
  • Property acquired with the aid of ancestral property and property transferred by its members.

Disadvantage-

  • Any additions to the family, by way of birth or marriage, become a member of the HUF and get equal rights on the property. The common property cannot be sold without the consent of all the members.



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