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Legal requirement A HUF is created through executing a deed, getting HUF PAN and
opening a bank A/c in the name of HUF. The cost of creating a HUF is a few thousands
of rupees.
Capital Infusion- HUF corpus can be created with money received as gifts from
relatives or with assets received under a will or inheritance, as it enjoys tax exemption.
Caution should be taken that personal assets and funds are not transferred to the HUF account, as
income generated from it shall later be clubbed under personal income under Section 64 (2).
How it works?
Although Salaried individual cannot divert his salary income into HUF, he can get a leverage if
he plans to earn additional income and can do it in the name of a HUF, thereby reducing his
taxable income. Suppose, an individual has a salary income of Rs. 12 Lakhs and is earning
additional business income of 6 Lakhs. Now, if he creates an HUF and does business in the name
of a HUF, then this total income will be taxable under HUF and he could reduce his tax liability
after availing benefits under various sections which would otherwise not be allowed, had he
earned it in his own name.
Apart from above, below are additional non-exhaustive techniques of reducing tax liability
through HUF.
1) Rental Income from a property Rental income from a property could be received on
behalf of a HUF instead of an individual account.
2) Business Income Profits generated out of the family business, in the name of a HUF, shall
be taxed accordingly and exemptions will give more leverage on tax saving.
3) The remuneration to Karta and members Remuneration to Karta and other family
members is an allowable deduction from income of an HUF.
4) Loan to HUF members - If the business, capital or investment of the HUF is expanding, then
such expansion can be done in the individual names of the members of HUF by giving loans to
the members from the HUF. The HUF may or may not charge interest on the loans given.
5) Family Settlement or Arrangement - The sole purpose of the family settlement should be to
settle existing or future disputes regarding property, amongst the members of the family. Since
this arrangement does not involve transfer, it would not attract gift tax, capital gains tax or
clubbing. In a family arrangement, tax incidence is considerably reduced or it may even become
nil.
Hence, setting up of an HUF can definitely help reduce tax liability, however, HUF transactions
should be carefully thought through and planned properly so as to face the precision of incometax scrutiny given the fact that tax authorities are skeptic towards HUF returns.