HUF for as a Tax Planning Tool

A tax professional is the last person you would expect to dish out matrimonial advice, but Delhi-based chartered accountant Mahesh Agarwal often tells his bachelor clients to tie the knot. "If they are paying too much tax and all possible deductions have been availed of, the only way to bring down the tax liability is by starting a Hindu Undivided Family (HUF). However, they can do so only after they marry," he says. Though tax planning must figure in the list of 10 whackiest reasons to say 'I do', there is no doubt about the usefulness of the HUF as a tax planning tool. The taxman treats the HUF as another entity, which is entitled to the same exemptions as any other individual taxpayer and enjoys the same deductions as you and I. This effectively gives the karta additional basic tax exemption of 1.8 lacs per year, an additional tax deduction under Sections 80C, 80CCF and 80D, along with the benefit of lower tax slabs. The enormous tax savings from this arrangement are what led Suresh Bohra to set up an HUF in 1995. It helps this Delhi-based stocks and commodities broker save close to 86,000 a year in taxes. "As the karta of the HUF, I get a combined basic exemption of 3.6 lacs a year as well as a savings limit of 2.4 lacs a year under Section 80C and 80CCF," he says. Bohra isn't alone. Lacs of taxpayers, including salaried professionals, small businessmen, even retirees, use HUFs to save tax. You too can avail of this benefit provided you fulfill the conditions and complete the legal formalities laid down for an HUF. Who can form HUF? Any Hindu, Sikh, Jain or Buddhist man can form an HUF, provided he is married. In fact, an HUF is automatically constituted when a couple exchanges wedding vows. Still, there are a few simple formalities to be completed for the HUF to function as a legal entity (see graphic). The first step is to form a corpus for the HUF. This can be any capital asset (property, gold, jewellery, securities, deposits) or cash. This is not as easy as it may sound. You can't transfer just any asset to your family 'hotchpot'. Any personal funds or property given by an individual to the HUF will lead to clubbing provisions under Section 64 (2) of the Income Tax Act. This means

the income from these assets will be treated as that of the individual, thus defeating the very purpose for which the HUF was established. A husband and wife can form an HUF but a wife can only be a member, not a co-parcener. Therefore, the HUF income will not be assessed separately. A member has equal rights but only a co-parcener can demand the partition of the HUF. "Only the birth of a child will give the unit the status of an HUF for tax purposes," says chartered accountant and legal expert Rakesh Gupta. The HUF can be formed with money received as gifts from relatives. But there's again a tax implication here. While there is no tax on gifts received by an individual from specified blood relatives, the HUF does not enjoy this exemption. "The HUF is not an individual, so it has no relatives. Any money it gets will be treated as a gift from a stranger. If the value of the assets received as gifts in a year exceeds 50,000, it will be deemed as income of the HUF and taxed accordingly," says Rakesh Gupta. Even so, an HUF can safely receive gifts of up to 1.8 lakh in a year without incurring any tax liability because of the basic exemption available to it. In fact, if the HUF invests 1.2 lakh in specified tax-saving instruments under Section 80C and 80CCF, it can receive assets worth up to 3 lakh a year without having to pay a paisa as tax. The best way to avoid the tax tangle is to form the HUF corpus with assets received as part of a will. But here too there are certain conditions to be met. inherited by the individual, transferring it to the HUF clubbing. "A person can give property and other assets to should be clearly specified that the asset is for setting Mukesh Goel, director, Mukesh Raj & Company. If the property is will again lead to his son's HUF but it up the HUF," says