100% Satisfactory Services A trusted partner for all Tax

HUF guidelines: How can forming a Hindu Undivided Family (HUF) reduce your taxes?

Table of Contents

HUF guidelines : “The laws of a Hindu Undivided Family (HUF), can greatly reduce your taxes if you are a salaried individual with supplementary income from other sources or if you are likely to inherit something. This article explains how to create HUF, who can do it, and how it can save you more money on taxes.”

How can Hindu Undivided Family (HUF) guidelines be established that reduce taxes?

Consequently, it is a Hindu Undivided family, as the name indicates. It carries legal status. A HUF can do so in the same way that a partnership or corporation can operate a business and generate revenue.

The ability to divide income is a major factor in forming HUFs. Therefore, if you have Rs 1000 from your existing business and set up this new organization, a HUF, you might receive Rs 400 from it and keep Rs 600 for yourself.

Subsequently, since that HUF is a distinct legal entity, you may reduce the tax.

The first thing to comprehend is the precise process of creating a HUF.

A couple with at least one child may open a HUF. The requirement is that they must belong to one of the following communities: Hindu, Jain, Sikh, or Buddhist.

The necessity of having a child to form a HUF is a topic of significant debate.

Although there are differing opinions, we believe that it is safer to establish the HUF after giving birth.

Because the husband is the Karta, or the person responsible for conducting the HUF regularly, the wife is what is referred to as a coparcener in HUF guidelines; she is a member of the HUF, and you need a coparcener.

That’s the reason for the issue. According to the HUF guidelines formation, however, you must have a husband, wife, and child to be secure; they must all practice one of these four religions.

What is the procedure for forming an HUF, and what kind of paperwork is required for it?

It’s fairly easy after you meet these prerequisites. Additionally, HUF guidelines update three steps constitute this procedure.

Step 1: Create a Hindu Undivided Family (HUF) Deed

The details of the Karta and his family are used to draft the HUF deed.

The HUF deed requires ₹100 in stamp paper.

The HUF deed and the stamp paper must be signed by the Karta and notarized.

Step 2: Apply for a PAN Card for HUF

Form 49A (Application for Allotment of PAN) shall be filed to apply for the HUF PAN card.

The Karta shall put his signature in three places on Form 49A and courier the documents listed below to “Income Tax PAN Services Unit (Managed by Protege eGov Technologies Ltd.) 4th Floor, Sapphire Chambers, Baner Road, Baner, Pune – 411045”:

  1. a) Form 49A (Original)
  2. b) HUFDeed with Stamp Paper (Photocopy)
  3. c) Self-attested PAN and Aadhaar Card of the Karta (Photocopy)

Step 3: Open a Bank Account for HUF   

After obtaining the HUF PAN card, Karta can open a savings account at the nearest branch.

A few banks might demand a joining amount or an insignificant charge for opening an account, which would enable you to put some money into the HUF bank account. Yes, that’s how a HUF is opened.

Although we have explained all the HUF guidelines that you can give the nominal amount as a gift during this step, it is best if you do not finance an HUF and establish its capital. Simply put, you are moving funds from your own account.

Naturally, the rationale is that the full benefit of the HUF is lost when the Income Tax Department begins to combine it with your income.

Actually, the question consists of the following: How should a HUF be funded?

According to the HUF guidelines, we are explaining the four legal and tax-efficient ways to finance a HUF under section 2(31) of the Income Tax Act, 1961.

First: That a will can be used to pay for it. It is acceptable if a member of your family dies and leaves a written statement stating that they are donating XYZ of their assets or cash to the HUF. In this way, funds and property can be transferred to the HUF.

Second: The HUF is eligible to receive a gift from an unconnected person, meaning it must come from someone who is not related to you or your family. The problem with this is that gifts over Rs. 50,000 are subject to taxes. Therefore, this is not a tax-efficient method of funding a HUF, even though it can provide some capital.

Third: According to HUF guidelines, you or a family member can lend money to the HUF. However, because the loan must bear interest, which is taxable in your hands, this is still another inefficient tax strategy. It is acceptable, but not preferred, to just pass the tax on to yourself.

Fourth: Establishing a business is the most effective way for a HUF to generate capital by expanding its base. The best illustration of this would be if you were a freelancer and an IT specialist. You can use the HUF to conduct portions of your business and accept some contracts. After that, the HUF can make money legally, store it, invest it in FDs, and so on. These are the methods used to finance a HUF.

Why do people form HUF, and how do they save taxes through it?

This is a very good subject, and the biggest reason for opening an HUF account is tax savings. Let’s take an example where I am an individual, and my wife and I both invest in mutual funds, considering we are in different income tax slabs and have varying income tax levels.

The government provides income tax exemption to every person.

First, we can claim a deduction of 1.5 lakh under the previous regime. All of these deductions are available if you invest in insurance or ELSS mutual funds under Section 80C. The process of establishing a HUF is therefore similar to producing a new person.

Now, let’s consider a fictitious scenario. Let’s imagine we inherited a rental home or some mutual funds. We must record the income on our books and pay taxes on it ourselves if we don’t have a HUF.

However, if you possess a HUF guidelines update, you will receive the additional 1.5 lakh 80C benefit if you place any of your assets there. Now, 80C is only one instance.

Furthermore, we have a three-lakh baseline exemption ceiling under the new tax regime. However, in the old tax system, it was lower at 2.5 lakhs, and under the current one, it has been raised to 3 lakhs. Therefore, there is still a lakh benefit of basic exemption even if the HUF is filing under the new regime.

In addition, there is a 1.25 lakh exemption for capital gains, which is the amount up to which long-term capital gains are free if the income is divided into two parts.

Once more, you can have 1.25 lakhs in both your own and HUF names.

It is comparable to dividing your revenue into a separate entity, especially if you’re in the category where you’ll be subjected to a surcharge, such as 50 lakhs.

To be honest, nominal income transfer by HUF can lead to significant tax savings.

To know more about : HUF Registration In India: An Ultimate 3-Step Guide

What are the drawbacks of forming a HUF?

HUFs have a tax advantage, but the drawback is the potential for legal issues, as any co-partner may request or assert a division, which essentially represents their portion of the HUF under Hindu law.

If the HUF guidelines assets are illiquid, such as an office you own, how would you assign one-fourth of the office to someone? You are then compelled to divide the earnings from the sale of the office.

The Karta manages the HUF, which typically signifies the family’s eldest male member. Subsequently, the Karta may not be managing it very successfully for the family; HUF guidelines allegedly governed by traditional Hindu law.

Consequently, legal issues may arise. Yes, this can save you a lot of money on taxes if you have a close-knit family and everyone gets along well.

If you have any questions about Hindu Undivided Family (HUF) registration, please contact E-Tax World.

Also read: HUF Registration Services In India