Overall exemption limit is Rs 4 lakh for HUFs

In continuation to my previous column on forming HUF and how it can help you save taxes, let's understand further. People generally prefer to invest in various types of financial products and schemes to reduce their tax liability and save their hard earned money. Investment decision requires a lot of knowledge and understanding, in hush and haw people generally tend to take such decisions which do not lead them to right investment decisions. So, does creating HUF make sense in terms of reduced tax liability and more savings?

Creating HUF provides you the leverage of having two separate accounts with different workings where an individual tends to save taxes in two ways. One is in a regular way under Section 80C where one tends to save up to Rs 1.5 lakh on investments, and the other way is by investing in HUF where there is an exemption of up to Rs 2.5 lakh. This happens because you and your HUF are two different legal entities for tax purposes and thereby results in great tax savings. Apart from your basic PAN, your HUF account also carries a separate PAN, hence, making it a separate entity. You can get similar benefits towards premium paid on health insurance policies under Section 80D and also the amount spent on specified diseases or towards money spent on medical treatment of a dependent relative.

However, it is not that simple as it looks. There are certain pre-requisites of having an HUF account such as one cannot have a HUF alone, he should have a family.

Though idle money lying in your savings account can be transferred to HUF account easily but one will not get any tax benefits out of it. Capital gains received from any investments incur a tax on it. Same is the case with the investment made through HUF. Any income earned through HUF also incurs tax on it. If any amount of money is transferred to HUF, and if that money earns any interest, then there will be tax liability on the entire earned amount. In the case of gifts, any gift worth up to Rs 4 lakh is exempt.

However, to get the tax benefit out of HUF capital, investment in HUF must be done in other ways. For example, money getting transferred in HUF on account of Will or inheritance will not incur any tax on it. Transfer on account of will/ ancestral property can be directly done in the HUF account rather than transferring it to the individual in the family and then to the HUF account. In that case, income earned through investment via HUF will have no tax liability over it up to Rs 2.5 lakh under basic exemption limit in HUF and further Rs 1.5 lakh under Section 80C. So overall there is an exemption of Rs 4 lakh on entire earning through HUF. Thus, HUF helps in saving taxes.

The writer is chief gardener, Money Plant Consultancy