G. TAX ADVANTAGES OF HUF
1. Under the Income Tax Act, an HUF is a separate taxable entity, with its own assets, liabilities and sources of income.
2.Its income is taxed independently of the members’ incomes, and is entitled to the same exemptions and deductions as any other individual taxpayer.
3. If other members of the family are in the highest tax bracket, it is prudent to generate income of HUF by investing its funds in income-generating avenues to take advantage of the lower tax
base.
4. Through intelligent planning, an individual can shift some of the tax-inefficient investments to the HUF hotchpot, thus dividing his taxable income between two entities, and lowering his annual tax burden.
5. If income generating assets are transferred to an HUF under a will or a gift deed, it can benefit from the basic exemption and a lower tax slab.
6. Any income received from an HUF by its members is exempt from tax.
7. The HUF certainly leads to additional paperwork and maintenance of accounts, but the tax savings are enormous.
8. Except for salary, HUF can earn from the other basic heads of income, like capital gains, rent, profit from business, and income from other sources.
9. It can invest the initial corpus as well as the gifts received in subsequent years to earn capital gains.
10. Ancestral property can be let out to earn rental income.
11. HUF can also start a business and earn profit from it.
12. Interest and royalty incomes are categorized as other sources of income for the HUF.
13. It can also claim deductions under Chapter VI-A, and also invest in tax-saving instruments under Section 80C, 80CCF and 80D.
14. High-income individuals (HNIs), whose limits are exhausted, can use the additional deduction available to the HUF to save tax.
15. If some of the wealth of an individual, such as residential property and gold, is owned in the name
of his HUF, it reduces his wealth tax liability, which is otherwise 1% if wealth exceeds Rs.30 lakh.
16. The benefit of deduction available on interest and repayment of principal on a home loan is available to the HUF also and can be used to increase the tax benefit.
17. If your second house is lying vacant, you can save tax on its notional rent income if the property belongs to your HUF.
18. If a service provider businessman splits his services by setting up an HUF, he can avoid the hassle of charging service tax and depositing the same in the exchequer.
19. Again, splitting a small-scale business between the individual and his HUF will keep the sales turnover within the prescribed limit of small-scale industries and allow both entities to avail exemptions and incentives provided by the government, to ensure healthy margins.
20. An HUF can also run a business, and unlike other corporate entities, there is no minimum alternative tax (MAT) on HUF-owned businesses, enhancing the company’s competitive advantage.
21. If there are enough people in the HUF, a karta can get a group health insurance cover, or a family floater plan which allows maximum relatives, at a lower price than that of an ordinary plan.
22. The premium paid for health insurance is deductible in the hands of the HUF under Sec 80D, which will bring down the taxable income of the HUF while offering insurance cover for the entire family, and in case the proposer (karta of HUF) dies, a new proposer can take his place.
23. If the karta does not have a high income, the HUF can also pay him a reasonable salary, for his services towards the HUF, commensurate to his skills, the nature of its business and time devoted by him towards it, provided it does not seem to be done to gain a tax arbitrage.
24. This salary will be taxable in the hands of the karta as an individual, while it will be fully deductible from the HUF income.
25. The income earned by the HUF can be used for household expenses of the family, which will not only prevent the HUF corpus from bloating but also allow co-parceners to use their own individual incomes optimally, for building their own wealth, as the HUF income will take care of their living
expenses.
26. The karta can gift money to the co-parceners from the income earned by the HUF, which is tax-free income in their individual hands.
27. The HUF can also give loans to the karta or co-parceners for setting up a different business, and can charge interest on the loan, which is fully deductible in its income tax returns.
28. Therefore, for the borrower, it will be taking money from one pocket and putting it into another and getting tax deduction on the interest.
29. The HUF concept is, therefore, useful in tax planning, but one must factor in the cost of compliance, and also consider the impact of splitting the HUF in the future.
1. Under the Income Tax Act, an HUF is a separate taxable entity, with its own assets, liabilities and sources of income.
2.Its income is taxed independently of the members’ incomes, and is entitled to the same exemptions and deductions as any other individual taxpayer.
3. If other members of the family are in the highest tax bracket, it is prudent to generate income of HUF by investing its funds in income-generating avenues to take advantage of the lower tax
base.
4. Through intelligent planning, an individual can shift some of the tax-inefficient investments to the HUF hotchpot, thus dividing his taxable income between two entities, and lowering his annual tax burden.
5. If income generating assets are transferred to an HUF under a will or a gift deed, it can benefit from the basic exemption and a lower tax slab.
6. Any income received from an HUF by its members is exempt from tax.
7. The HUF certainly leads to additional paperwork and maintenance of accounts, but the tax savings are enormous.
8. Except for salary, HUF can earn from the other basic heads of income, like capital gains, rent, profit from business, and income from other sources.
9. It can invest the initial corpus as well as the gifts received in subsequent years to earn capital gains.
10. Ancestral property can be let out to earn rental income.
11. HUF can also start a business and earn profit from it.
12. Interest and royalty incomes are categorized as other sources of income for the HUF.
13. It can also claim deductions under Chapter VI-A, and also invest in tax-saving instruments under Section 80C, 80CCF and 80D.
14. High-income individuals (HNIs), whose limits are exhausted, can use the additional deduction available to the HUF to save tax.
15. If some of the wealth of an individual, such as residential property and gold, is owned in the name
of his HUF, it reduces his wealth tax liability, which is otherwise 1% if wealth exceeds Rs.30 lakh.
16. The benefit of deduction available on interest and repayment of principal on a home loan is available to the HUF also and can be used to increase the tax benefit.
17. If your second house is lying vacant, you can save tax on its notional rent income if the property belongs to your HUF.
18. If a service provider businessman splits his services by setting up an HUF, he can avoid the hassle of charging service tax and depositing the same in the exchequer.
19. Again, splitting a small-scale business between the individual and his HUF will keep the sales turnover within the prescribed limit of small-scale industries and allow both entities to avail exemptions and incentives provided by the government, to ensure healthy margins.
20. An HUF can also run a business, and unlike other corporate entities, there is no minimum alternative tax (MAT) on HUF-owned businesses, enhancing the company’s competitive advantage.
21. If there are enough people in the HUF, a karta can get a group health insurance cover, or a family floater plan which allows maximum relatives, at a lower price than that of an ordinary plan.
22. The premium paid for health insurance is deductible in the hands of the HUF under Sec 80D, which will bring down the taxable income of the HUF while offering insurance cover for the entire family, and in case the proposer (karta of HUF) dies, a new proposer can take his place.
23. If the karta does not have a high income, the HUF can also pay him a reasonable salary, for his services towards the HUF, commensurate to his skills, the nature of its business and time devoted by him towards it, provided it does not seem to be done to gain a tax arbitrage.
24. This salary will be taxable in the hands of the karta as an individual, while it will be fully deductible from the HUF income.
25. The income earned by the HUF can be used for household expenses of the family, which will not only prevent the HUF corpus from bloating but also allow co-parceners to use their own individual incomes optimally, for building their own wealth, as the HUF income will take care of their living
expenses.
26. The karta can gift money to the co-parceners from the income earned by the HUF, which is tax-free income in their individual hands.
27. The HUF can also give loans to the karta or co-parceners for setting up a different business, and can charge interest on the loan, which is fully deductible in its income tax returns.
28. Therefore, for the borrower, it will be taking money from one pocket and putting it into another and getting tax deduction on the interest.
29. The HUF concept is, therefore, useful in tax planning, but one must factor in the cost of compliance, and also consider the impact of splitting the HUF in the future.