Generally a person who has high income doesn’t bother about tax planning and find them paying too many taxes. One of my friend Mr. Deepak as the same case as he and his wife both earns well as well as income from property. But after paying a big amount of taxes, consult with some CA. He only come to know about HUF that time.
HUF is an old model in India and with the formation of HUF one can save a big amount of taxes. Any married man in India can form the HUF entity if he is from Hindu, Sikh or Buddhist community. HUF is completely a separate entity and different from individual. It has the same income tax slabs as per individual tax slabs. It means the 200000 income tax exemption is also available to HUF. Also it qualifies for the investment tax benefits under section 80C, 80G, 80D, 80L Section 54 of capital gains and more too.
Any two members of a family can create HUF. The elder male member of the family works all the work as a Karta. It means when a person get married, he and his wife can create HUF family and children will include in it when born. There is no restriction in the number of members in HUF family.
HUF family can earn any income except income from salary.
For creating an HUF family you need to apply for the PAN card as it’s altogether different with the personal PAN card. Second you need to open a saving account with bank for the transactions.
Karta is generally the elder male member of the family but in some cases Female can be Karta where male member of the family passes away and left behind only female members in the family.
There are, however, a few simple procedures to be followed, such as executing a deed on a stamp paper to transfer assets to the HUF -this can be property, cash, jewellery, etc.
Each married member of the family can create his owns HUF and there can be multiple HUF family in one family itself. Like there are two boys of Mr. Ramesh and he has his own HUF family. When the two boys get married, they can create their own HUF and hence three HUF families can be in one family itself.
Transferring money into an HUF is not as easy as it seems as one cannot just transfer money or assets into the HUF name, as this gets combined into a single entity under the existing law and taxed as such. The ideal way to setup a HUF is to put some of the gifts (cash, jewellery, etc) received at one’s wedding into the HUF. The other way is to set up the HUF using ancestral property from a will though in this case the will should specify that the property will go to the HUF and not the individual.
One should be aware of is that while transferring gifts to the HUF, there is no exemption on receiving gifts from specified relatives like in the case of an individual - the HUF is liable to pay taxes on all gifts. However, since the HUF gets tax benefits like an individual entity, gifts of up to ₹ 2 lakh ( limit can go up to ₹ 3 lakh if the tax benefits under Section 80C are fully used) are exempt from taxation.
You need to maintain separate book of accounts for HUF and also need to file income tax return for HUF too.
There are some disadvantages too of HUF as suppose there is a property in HUF name and you want to sell it, you will find it difficult as people always want clear property documents for purchasing it.
HUF family can only be dissolved with the agreement of all members and not the wish of Karta.