Creation of HUF – Tax Planning Advantage

“Tax Planning’ is an important agenda of any individual. People often end up paying taxes even after exhausting their limits under Section 80C, 80 D and so on. However, do you know that a very important tool which is often overlooked, is formation of a HUF, which is a legitimate way of reducing your tax liability.

What is a HUF?

HUF stands for Hindu Undivided family, governed under Hindu law board and could be formed by a married couple or by members of a joint family. HUF could be formed by two members, at least one among whom should be a male member of the family. Senior most male member of the family would become ‘Karta’. Although it is governed by the Hindu law board, it can be formed by Jains, Sikhs and Buddhists as well.

Tax perspective

HUF is considered as a separate entity and is therefore taxed separately. This helps to separate tax obligations of an individual from that of his family. Tax slabs of HUF are same as that of an individual, with an exemption limit of 2 lakhs and qualifies for all the tax benefits under Section 80 C, 80D,80G,80L and so on.It also enjoys exemptions under Section 54 and 54F with respect to capital gains.

How to create HUF?

HUF has to be created keeping in mind the legal and financial requirements.
Legal requirement – A HUF is created through executing a deed, getting HUF PAN and opening a bank A/c in the name of HUF. The cost of creating a HUF is a few thousands of rupees.
Capital Infusion- HUF corpus can be created with money received as gifts from relatives or with assets received under a will or inheritance, as it enjoys tax exemption.

Caution should be taken that personal assets and funds are not transferred to the HUF account, as income generated from it shall later be clubbed under personal income under Section 64 (2).


How it works?

Although Salaried individual cannot divert his salary income into HUF, he can get a leverage if he plans to earn additional income and can do it in the name of a HUF, thereby reducing his taxable income. Suppose, an individual has a salary income of Rs. 12 Lakhs and is earning additional business income of 6 Lakhs. Now, if he creates an HUF and does business in the name of a HUF, then this total income will be taxable under HUF and he could reduce his tax liability after availing benefits under various sections which would otherwise not be allowed, had he earned it in his own name.

Apart from above, below are additional non-exhaustive techniques of reducing tax liability through HUF.

1) Rental Income from a property – Rental income from a property could be received on behalf of a HUF instead of an individual account.

2) Business Income – Profits generated out of the family business, in the name of a HUF, shall be taxed accordingly and exemptions will give more leverage on tax saving.

3) The remuneration to Karta and members – Remuneration to Karta and other family members is an allowable deduction from income of an HUF.

4) Loan to HUF members - If the business, capital or investment of the HUF is expanding, then such expansion can be done in the individual names of the members of HUF by giving loans to the members from the HUF. The HUF may or may not charge interest on the loans given.

5) Family Settlement or Arrangement - The sole purpose of the family settlement should be to settle existing or future disputes regarding property, amongst the members of the family. Since this arrangement does not involve transfer, it would not attract gift tax, capital gains tax or clubbing. In a family arrangement, tax incidence is considerably reduced or it may even become nil.

Hence, setting up of an HUF can definitely help reduce tax liability, however, HUF transactions should be carefully thought through and planned properly so as to face the precision of income-tax scrutiny given the fact that tax authorities are skeptic towards HUF returns.