How to set up a HUF to save taxes in the right way?
This article explains what you need to do to save tax by creating a HUF.
This article explains what you need to do to save tax by creating a HUF.
A Hindu Undivided Family (HUF) is a separate “taxable person” in terms of tax payment with its own PAN card and bank account. Any income (rent, interest or capital gains) from assets correctly transferred to the HUF will be taxed separately. The HUF should consider which tax-regime is best for it: old or new.
Related:
Frequently asked questions on saving tax via Hindu Undivided Family (HUF): the complete guide
Here is a HUF with ₹10 lakhs of rental income and ₹30 lakhs of salary income operating in the new tax regime using the calculator here: Which is the best tax regime to choose from April?
(amounts in ₹ lakhs) | Without HUF | With HUF |
---|---|---|
Rental income | 10.00 | 10.00 |
Salary income | 30.00 | 30.00 |
Total income of members | 40.00 | 30.00 |
Total income of HUF | 0.00 | 10.00 |
Tax on rent | combined with salary | 0.62 |
Tax on salary | 9.36 | 6.24 |
Total tax | 9.36 | 6.86 |
Saved tax | – | 2.50 |
Transferring assets into the HUF, to save tax, is not easy. There are two rules that need to be followed:
In this article, assets refer to
It is important to note that assets once transferred into the HUF give ownership rights to all HUF members.
If you, as a HUF member, gift a property worth say ₹50 lakhs (market value) to a HUF for free (no consideration) or at below market price, then income from this property (rent or capital gains) will be taxed in your hand due to income clubbing rules.
If you, as a HUF member, loan ₹10 lakhs to the HUF at say 1%/year and the HUF invests the amount at 5%, then on paper there is no tax on the 4% difference in returns. This plan is considered a form of tax evasion that is illegal.
To understand if you should create your own HUF:
In each of the cases below,
Related:
Gift tax exemption rules: who can receive a gift from a relative that is tax-free?
Any ancestral property passed, via father / grandfather / great-grandfather, to the HUF will save both gift tax and tax on future rent or capital gains. There will not be any clubbing.
As in the above case, a property transferred to the HUF via will, whether from a member or non-member is also similarly tax-free.
Non-members, who are not a part of the HUF, are automatically not relatives of the HUF. We know that from non-relatives, only up to ₹50,000/year gifts are tax-free. Therefore, if a HUF receives up to ₹50,000/year as gifts from non-members, it is tax-free.
If the HUF invests its own assets and gets income / rent / capital gains then that is tax-free and not clubbed.
Any assets transferred into a different HUF by splitting (partitioning another HUF) are similarly tax-free.
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This post titled How to set up a HUF to save taxes in the right way? first appeared on 23 Jun 2024 at https://arthgyaan.com