27 Nov 2008

How to save more Tax!

Are you sure that you have done the year's Tax planning? Think again.
You must have already saved tax under Sec 80 C by investing upto Rs 1,00,000 in various investment instruments. But did you know that you can save more tax than that by investing more?

The answer is HUF (Hindu Undivided family). An HUF is a good tax-cutter since it is treated as a separate entity and taxed accordingly. As per Wikipedia, a Hindu Joint Family or Hindu undivided family (HUF) or a Joint Hindu Family is an extended family arrangement prevalent among Hindus of the Indian subcontinent, consisting of many generations living under the same roof.

How does an HUF reduce taxes?
An HUF is an efficient tool to plan taxes because, under the income tax laws, it is treated as a separate entity and assessed to tax as a separate entity. Accordingly, an HUF is eligible for all the deductions and exemptions, including the benefit of the basic limit chargeable to tax and wealth tax that’s available to an individual. And so, like an individual, an HUF’s income is tax-free up to Rs 1,00,000. It also enjoys the exemption under Sections 54 and 54F in respect of capital gains, the deductions under Sections 80CCA, 80CCB, 80D, 80G, 80GG and 80C
The HUF is also eligible for the following deductions: Section 80D, for the insurance premium paid on the health of its members; Section 80G, for any donations it makes.

Then, under Section - 80C, it gets a deduction in respect of the premium paid on life insurance policies for its members.

What income is regarded as HUF income?
All the income that arises on the utilisation of the HUF’s assets and on the investment of its funds is regarded as the HUF’s income that is assessed separately and chargeable to tax. Importantly, the income should have been earned using HUF property or funds or property only; if it arises on account of the personal investments of any member, it will generally be regarded as the individual income of the member.

What are the options?
1) BORROW FUNDS: The capital of an HUF can also be enhanced by borrowing funds from people who are not members. If the borrowing is specifically in the HUF’s name, and it is thereafter invested in the HUF’s name, the income arising on the investment will be regarded as the income of the HUF.

2) TRANSFER individual funds to the HUF and then invest the money in tax-free instruments. Since the income from such investments will be tax-free, it will not be clubbed with the individual’s income. The income arising on the reinvestment of the tax-free income (which may be in taxable income-yielding assets) will also not be clubbed, since only the income arising on transferred amounts is clubbed.

HDFC Bank Ltd.


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