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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.

How to set up a HUF to save taxes in the right way?


Posted on 23 Jun 2024
Author: Sayan Sircar
6 mins read
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This article explains what you need to do to save tax by creating a HUF.

How to set up a HUF to save taxes in the right way?

📚 Topics covered:

How does a HUF save tax?

Summary
  • HUF is recognized as a separate taxable entity, complete with its own PAN and bank accounts.
  • This setup allows for the tax-effective distribution of income from assets like real estate, stocks, or mutual funds.
  • However, not all transfers into an HUF are beneficial. Direct gifts or below-market transactions do not get the benefit.

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

A worked-out example for tax saving with HUF

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

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Effective Strategies for Asset Transfer into a HUF

Transferring assets into the HUF, to save tax, is not easy. There are two rules that need to be followed:

  • if you gift or transfer any asset without adequate consideration then the income from that asset is clubbed with the person making the transfer
  • only ancestral property and small gifts, less than ₹50,000/year, can be transferred into the HUF

In this article, assets refer to

  • cash in the bank or otherwise
  • immovable property like real estate
  • movable property like shares and mutual funds

It is important to note that assets once transferred into the HUF give ownership rights to all HUF members.

Also read
Goal-based investing: should you use a unified portfolio?

Transfer to HUF that does not save taxes

Direct gifting of personal assets without consideration

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.

Low-Interest Loans to HUF

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:

Transfer to HUF that actually saves taxes

In each of the cases below,

  • there is no tax on the gift/transfer
  • there is no clubbing of the income / rent / capital gains from such gifts in the hands of any other HUF member or Karta

Related:
Gift tax exemption rules: who can receive a gift from a relative that is tax-free?

Ancestral property transfer

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.

Property transfer via will

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.

Gift from non-members

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.

Growth of assets already in the HUF

If the HUF invests its own assets and gets income / rent / capital gains then that is tax-free and not clubbed.

Partitioning an existing HUF

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


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