I am sure you would love to reduce to reduce your tax liability. In fact everybody wish to save more and more tax. In this article we are going to discuss the concept of Hindu Undivided Family (HUF) and its utility in saving tax.
Concept of HUF
A hindu undivided family is a separate legal entity which can have assets and liabilities on its own name and can even have a regular source of income. Accordingly, HUF is also liable to pay tax separately. HUF comes under the purview of Hindu Law. Other than Hindus, Jains, Sikhs and Buddhist can also form HUF. HUF is headed by the elder male member of the family usually father who is known as Karta. However, with the changes in law, a female can also become Karta. HUF can be created by creating an account on the name of HUF.
Impact of HUF on tax
In order to save your tax through legal way, you need to create a HUF and apply for a PAN card on the name of HUF. Let us take an example:
Husband’s salary – Rs. 8, 00,000
Wife’s salary – Rs. 6, 00,000
They are also earning Rs. 6, 00,000 annually from an additional ancestral property
An important point to think at this stage is in whose income, this additional income from property will be clubbed. There can be three choices:
1) Club it with the income of husband
Husband’s total income = His salary + Income from property
= Rs. 8, 00,000 + Rs. 6, 00,000
= Rs. 14, 00,000
Tax Payable by husband (for A.Y. 2015-16) = Rs. 3, 95,000
Wife’s total income = Rs. 6, 00,000
Tax payable by wife = Rs. 70,000
Total tax payable by the family = Rs. 3, 95,000 + Rs. 70,000 = Rs. 4, 65,000
2) Club it with the income of wife
Husband total income = Rs. 8, 00,000
Total tax payable by husband = Rs. 1, 10,000
Wife’s total income = Her salary + Income from property
= Rs. 6, 00,000 + Rs. 6, 00,000
= Rs. 12, 00,000
Total tax payable by wife = 3, 35,000
Total tax payable by the family = Rs. 1, 10,000 + Rs. 3, 35,000 = Rs. 4, 45,000
3) Create a HUF
Husband total income = Rs. 8, 00,000
Total tax payable by husband = Rs. 1, 10,000
Wife’s total income = Rs. 6, 00,000
Tax payable by wife = Rs. 70,000
Total Income of HUF = Rs. 6, 00,000
Total tax payable by HUF = Rs. 70,000
Total tax payable = Rs. 1, 10,000 + Rs. 70,000 + Rs. 70,000 = Rs. 2, 50,000
If you expect to receive an ancestral property or a part of it or wealth in any other form, then instead of getting it transferred on your name, you can get it transferred on the name of HUF. Once you do it, all incomes accruing from this property will be taxable in the hands of HUF and you will be able to reduce your tax liability. Moreover, HUF being a separate entity can avail the benefits under 80 C, thereby your own limit will be saved. The overall benefit under 80 C will be more than the individual benefit. You can also use the income of HUF for meeting your family’s day to day expenses.
In the earlier part of this article, we have discussed that HUF is a separate legal entity. Therefore, by virtue of being a separate legal entity, assets owned on its name can not be taken by anybody for their personal use. The division of property can take place only at the time of partition of HUF demanded by its co-parceners. For this reason, the decision of creating HUF and saving tax through this route has to be a very thoughtful one.
