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The budget for 2020 has made significant changes. Dividend distribution tax has been abolished & the dividend income from shares and mutual funds is now taxable in the hands of recipient. We had advised our readers in 2017 to form a HUF. Now the reason for making it has become stronger.
We once again introduce the concept of HUF and explain the process of creating an HUF along with the benefits.
What is a HUF?
HUF stands for Hindu Undivided Family. A HUF is automatically formed when a Hindu wedding takes place, although the ‘Hindu’ word here has a much wider connotation and includes Sikhs, Jains and Buddhists.
A HUF can be officially created after marriage. The HUF consists of all members of the family and is initially composed of the couple & later expands to include any children. Typically, the eldest member of the family is designated as the ‘Karta’ and the other members are called coparceners. The HUF can be called by the name of the husband followed by ‘HUF’. For example, Prem Kumar Jain’s HUF can be called Prem Kumar Jain HUF. Some people may also call it Prem Kumar Jain & Sons HUF.
Just like any other person, a HUF has its own PAN card and bank account, with the date of incorporation being the date of marriage and the place of incorporation, being the place of marriage.
But why form a HUF?
The major benefit of getting the PAN card for your HUF is that there is one more entity for taxation purpose. Following the creation of a HUF, you must file separate returns for the income of HUF. The same tax slabs are applicable to HUF as to an individual assesse. Income tax returns have to be filed like any individual filing tax returns. A HUF hence can get advantage of 80 C of Rs. 1.5 lakhs & The capital gains tax exemption of Rs. 1.0 lakh is also available.
Talking about tax savings, from FY 2020-21 onwards, exemption from income tax of Rs.5.0 lakhs is available. Adding another Rs 1.5 lakhs, takes the total tax-free income to Rs 6.50 lakhs. Hence, a person who has an income in the highest tax bracket of 30%, can save taxes amounting to more than RS. 2 lakhs if he can show an income of Rs. 6.5 lakhs in his HUF. Even an income up to Rs. 11.5 lakh (Rs 10 lakhs + Rs. 1.5 lakhs from 80C) will be taxed at lower tax bracket giving significant savings. This is apart from the savings he may get if his own tax slab is lowered due to transfer of income to HUF.
When should I form a HUF?
You can form a HUF any time after marriage. Our advice is to form it as soon as possible after marriage and start building the capital for it at the pace you are comfortable.
How to get income in HUF?
Having understood the mechanism to create a HUF & the tax benefit, the next step is to generate income in the HUF. A HUF can receive assets through inheritance or a gift (subject to a gift tax). In such an event, all such assets are HUF property and any income from such assets will be taxed to the HUF. Even the rental income received from such properties / gift will be treated as HUF income & taxed accordingly.
It is important to note here that a HUF cannot earn any salary, although it can run a business and earn business income.
Is there a catch or what can be the problem?
One of the problems of forming a HUF is that it is that all assets are the property of the coparceners (i.e. all family members). Any coparcener can ask for a partition of the property & take his/her share. The Karta can bequeath only his share of the HUF & not the entire property which is in the HUF. Hence our advice will be to keep real estate out of HUF & keep only financial assets in it. This will not burden you with a scenario of a forced partition of a real estate asset.
We will strongly advise our readers to form a HUF. We have helped many clients in getting HUF registration done. You may write to us at fin.chikitsak@gmail.com, in case you want us to create HUF for yourself.
Happy investing
