In the era of progressive taxation system, it is always advisable to distribute the income across multiple legal entities. A new pan card can save approximately 1.6Lkhs every year in taxes. Yet creating a Hindu Undivided Family (HUF), is one of the least talked about topic in India’s financial advisers.
How it saves tax:
- HUF becomes a separate legal entity. Hence it is eligible for rebates that is enjoyed at lower tax rate. Making the first 4-5 Lakhs of income virtually tax free.
- Cost of set up is also negligible. (20/- for a stamp paper, 50/- to get it notarized, 107/- for the PAN card application, ~200/- per annum for the bank account, ~400/- per annum for the demat account) Remember the bank account & demat account are optional.
Process to set it up:
- Create an affidavit for HUF & get it notarized.
- Apply for PAN. It is a simple process that you can do from your home.
- Open a bank account (or post office)
- Open a demat account
- Buy 1.5 Lakhs of NSC or investments that are 80C eligible.
- Transfer your assets to HUF so that the returns on it can be reported at a lower tax slab
- File HUF income tax returns
Process to dissolve:
- The best way to dissolve the HUF is to use its assets for the family expenses. You could buy a car, pay for the maid, gardener, driver salary etc. Buy furniture, pay for the medical expenses of the Karta or coparceners etc.
- Although there is no restriction on HUF holding property or shares of business, try to keep the HUF hold liquid funds invested in taxable entities (like bonds & FD). This way it is easy to prevent the HUF for owning too much funds and make periodical withdrawals to extinguish easier.
- As long as the karta is alive, the coparcener cannot force it to dissolve. The HUF karta (under whose name HUF is formed) has the sole discretion on its assets.
- As the name suggests, only Hindus, Buddhist, Jains & Sikhs can open a HUF.
- Also people from Kerela are not eligible to open the HUF.
- The HUF is formed at the time of marriage and all lineal ascendants & descendants automatically become members, without exception.
HUF is beneficial for you only if your non-salary income is substantial. By moving those assets & income here, you could save some taxes. Apart from tax saving, there is little to be gained from this instrument.