Create HUF to save tax & Format of HUF Creation Deed

HUF stands for ‘Hindu Undivided Family’. According to section 2(31) of the Income Tax Act, 1961(hereinafter referred to as “The Act”) HUF is treated as an individual entity. HUF is treated as a ‘person’ for the purpose of assessment. All the hindu family members can come together to form a HUF. It should consist of all persons lineal descendants from common ancestors including their wives and daughters. Not only Hindus, Buddhist, Jains, Sikhs can also form HUF. HUF can be created automatically under a contract. HUF has its own PAN and files TAX Returns independent of its members.

Key points in creation of an HUF:-

• HUF is created as an independent member for the purpose of Income Tax Returns.
• Individuals assessee tax slab rate is also applicable on HUF.
• One can not transfer its own asset or money.
• To save tax you can transfer your ancestral property/assets to HUF. This will save your tax upto the exemption limit of an individual.
• You can transfer the money received on sale/transfer of ancestral property/asset to the HUF.
• Income earned from property of HUF can be further invested into other instruments such as shares, mutual funds, etc.
• To create a HUF it is not necessary to have multiple family members or existence of property is not a prerequisite. The family having no property can also be eligible to become an HUF. Jointness implies a family with faith and food. This is because it is understood that Hindu is born in a joint family.
• If any gifts received by the members of HUF whether on birthday, marriage etc will be treated as an asset of the HUF.
• Thus HUF is considered as a separate entity therefore the tax is also calculated separately on a different slab rate. One can save from the basic exemption limit of 2.5 lakhs. Similarly, HUF can also gain from this.
• Apart from the basic exemption limit of 2.50 lakhs, section 80C deduction upto 1.50 lakh is also available.
• 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 @5% = 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. 12,500.
• 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. 1,82,500 by creating an HUF and transferring ancestral property income and other income under HUF.

Note: An HUF is liable to pay Alternate Minimum Tax if the tax payable is less than 18.5 per cent (including cess and surcharge) of “Adjusted Total Income” subject to prescribed conditions.

• The following income are not taxed as a income of HUF:-
• If the member has any self acquired property and later without any consideration the member converted his self acquired property into a joint family member. Then it will not be taxable in the hands of the HUF.
• The income earned from the impartible estate will be taxable in the hands of the estate not in the hands of the member even if it belongs to the HUF.
• Personal income of the members can not be treated as the income of the HUF.
• “Stridhan” is the property wholly belongs to the women, therefore it can not be considered as an income of the family member.
• Property of a daughter can not be included in the HUF, even if it will be vested into HUF by the daughter of HUF.
• An HUF is recognized as a separate assessable entity under the Act. Its income may be assessed if following two conditions are satisfied:
• There should be a coparcenership. In this association, it is beneficial to make reference to that once a joint family pay is evaluated as that of HUF, it keeps on being surveyed as such in ensuing appraisal years till segment is asserted by coparceners.
• There ought to be a joint family property which comprises hereditary property, property gained with the guide of genealogical property and property moved by its individuals.

Note:- Property owned by the daughter will wholly belong to the daughter only. It will be her absolute property. If any income earned will be considered as her individual income in its individual status only. This will also apply to any legal heir obtaining property in the capacity of a descendent.