One of the most significant ways of saving income-tax for an Individual is to form a separate tax entity in the name of an Hindu Undivided Family. HUF is a separate tax entity in the eyes of law with a separate PAN card and subject to same income tax slabs, exemptions and deductions as applicable to Individuals. Hence it becomes an important tax saving tool for tax payers as income apportioned to HUF will again be exempt upto the basic exemption slab and then taxed at 10%, 20% or 30% as applicable.
e.g. there are 4 members in a family, Husband earning Rs. 24 lacs, Wife earning Rs. 16 lacs and 2 children. They also have an ancestral property which has been put on rent and is earning Rs. 5 lacs p.a.
In such a case, the rental income will normally be clubbed with either that of husband’s or wife’s, resulting in higher income and resultant higher tax burden for either one of them.
If however, they form an HUF and transfer the ancestral property to HUF, then rent will be taxed in the hands of HUF after taking advantage of the basic exemption limit, deductions under Chapter VI-A and then taxed as per slab rates. Hence, total tax outgo of the family will be significantly lower.
The salient points to be noted about HUFs are:
- Assets of the HUF belong to all the members of the HUF and not just one individual.
- Business can be conducted in the name of HUF.
- Tax returns are required to be filed by HUF by 31st of July every year. If the gross turnover exceeds Rs. 25 lacs/ 1 crore, a tax audit conducted by a CA will also be required and the tax return will have to be filed by 30th of September.
- The residential status of a HUF will be determined by where the control of HUF is residing. The HUF may be resident or non-resident in India.
- The Karta of the HUF can sign all documents on behalf of the HUF.
- HUF’s are recognized all over India except in the state of Kerala w.e.f. 01/12/1976.
- Hindu Undivided Family will be eligible to claim tax deductions under Chapter VI-A of the Income-tax Act, 1961.
- The Dividend income and the Long-term Capital Gains on listed securities held by HUF will also be exempted from tax.
- The income from Short-term Capital Gain by HUF will be taxed at a lower rate of 15 per cent tax only.