Am starting a thread on this subject. Will add info as time permits. May (may not) lead to any significant advantages. Request some tolerance for ambiguity until facts are collated - so please do not post questions like "Can I open a PPF account in HUF name, and save 20 rupees? Gurus, Please advise." at least for some time. Thanks.
The above is an extract from a communication received from S. Ramakrishnan, Chartered Accountant, Tirupur. Further clarifications regarding Account of Hindu Undivided Family in Public Provident Fund issued by the Reserve Bank in Circular dated May 25, 2005 (2005) 35 TCR 290 (St.) reads as under: "Public Provident Fund Scheme, 1968- Clarifications: In this regard, Government of India, Ministry of Finance vide letter F.No.2/8/2005-NS-II, dated May 20, 2005 have, inter alia, issued the following clarifications: (i) Sequel to amendments to various Small Savings Schemes to restrict the scope of investments only to individuals, the accounts, if any, opened by juristic persons (HUFs, Trusts and Provident Funds), that is, persons other than individuals (through single or joint accounts or deposits by guardians on behalf of minors and persons of unsound mind as per rules) on or after May 13, 2005, under any of the small savings scheme including Public Provident Fund Scheme, 1968, shall be treated as void ab initio and immediate action should be taken to close such accounts and to refund the deposits without any interest to the depositors. (ii) It may, however, be noted that the above amendments shall not be applicable to the existing accounts opened in accordance with the rules in operation prior to the amendments dated May 13, 2005. These shall continue till maturity and deposits/ withdrawals in/from these accounts shall be allowed to be made in accordance with the said rules. However, any extension of existing accounts shall be subject to the amendments dated May 13, 2005. The reader's inference that continuation of existing HUF Accounts is permissible stands confirmed. The clarification that the Hindu Undivided Families (HUFs) can continue existing Provident Fund Accounts is welcome, so that deduction under Sec. 80C can be availed. But such benefit will not be available for National Savings Certificate-Series VIII, Mutual Funds and the like, since no purchase in the name of HUF is possible from May 14, 2005. However, as pointed out by the reader, contribution to Provident Fund, from HUF income in any account opened even after May 13, 2005 in the name of the persons specified under Sec. 80C(4), should be eligible for deduction under Sec. 80C, since Sec. 80C(4) permits contributions to Provident Fund and Unit Linked Insurance Plans in the name of spouse or child in the case of individual or any member of the family in case of HUF. Merely because these savings schemes themselves have been discontinued in the name of HUF, the benefit of deduction for HUF is not lost as long as the savings are from the resources of the HUF. Even in respect of savings certificate or any other contribution to mutual funds, there is no positive requirement that the deposit has to be in the name of the HUF as such, while in the case of provident fund and unit-linked insurance plans, there is a positive permissibility for having the account in the name of the family members. The views of the reader should, therefore, pass muster, since they are well reasoned. If the object is to deny relief under Sec. 80C to HUF, such object is best achieved by amendment to Sec. 80C and not merely by shutting out unfairly the avenues of savings themselves hitherto available for the HUFs. S. Rajaratnam
Corpus in a Hindu Undivided Family (HUF) entity normally comes in the form of ancestral property or on partition of an HUF (thereby the common property being distributed among the Co-parceners). A HUF cannot be formed by gifting a sum to a HUF. This would attract the clubbing provisions contained in section 64 (2) of the Income Tax Act, 1961 and the income arising therefrom would be taxed in the hands of the individual. However, in an existing HUF, a Co-parcener can throw his individual property into the common stock of the HUF. For an HUF, at least one male member is required. On the matter of tax planning using HUF, based on the information given by you the following methods have been suggested. The exercise of tax planning can be complete only if full information about your case is made available.
If a trust is created by a male member to settle his separate property thereon for the benefits of his HUF, with a stipulation that income shall accrue for a specified period and the corpus going to the trust afterwards, provisions of Section 64 are not attracted.
Where an assessee withdraws funds lying in his capital account of the firm where he is a partner and the same is advanced to an HUF which is repaid by the HUF after a specified period of time, the said loan will not attract the clubbing provisions contained in Section 64 and the income arising from such advance will be assessable in the hands of the HUF.
A joint Hindu family springs from a common male ancestor and consists of his descendants in the male line, their spouses and unmarried daughters. Every male Hindu even when he is a member of joint Hindu family can and does constitute a joint family with his own descendants, a family which nevertheless is a part of the bigger family of which he is a member. Such a smaller family of the Hindu male who is himself a member of the bigger family constitutes a branch of the main family. Similarly sub-branches of the family can be formed by each of his male descendants. Each of these branches or sub-branches is in itself a HUF.
Extracts A Hindu Undivided Family (HUF) consists of members male and female, adult and minor. Some members are known as coparceners - normally from among the male members of the family. The term member is much wider in its scope than the term coparcener. Under the Income-Tax Act, 1964, the HUF is a separate taxable entity. A HUF is taxed at the same rates as is applicable to an individual, that is, for the assessment year 2000-2001 at the rates shown in the table.
As a HUF will be entitled to the basic exemption of Rs. 50,000 (now higher) and also to the lower rates of tax until the income reaches Rs. 1,50,000, it will be advantageous to have a separate taxable entity in the form of a HUF. Having such an entity will help to reduce the overall tax liability. In this context, one common question is whether it is possible to create a HUF, otherwise than through the existence of an ancestral nucleus. It is often believed that for taxability in the status of HUF, there must be a nucleus and that it should be ancestral. This view, however, is not right. Under the Hindu law, a male child on birth is capable of constituting a HUF. The assessment in this status and its actual creation however stand deferred until there is more than one member (at least one of whom shall be a coparcener).
The nucleus of a HUF may come by way of gift, will, and so on. The Hindu law in no way debars a gift from being received by Hindu karta (manager of the family), a will being made for the benefit of the HUF, or separate property of the members being thrown together for the benefit of the HUF. However, it is only a Hindu coparcener who can blend his individual property with that of a joint family. A female or any other member who is not a coparcener cannot blend individual property with that of joint property. A karta can accept a gift or will made to a HUF or the impressing of individual property of coparceners with that of the HUF. The gift or will can be from any person including a stranger to the joint family. In such a case however there must be a clear declaration of intention by the donor or testator that the gift or will is for the benefit of the HUF. Such a gift, will or property impressed can by itself form the nucleus of the HUF. Thus, even if there is no ancestral nucleus, a HUF can be created as a taxable entity by way of gift, will or by impressing individual property with that of HUF. The only requirement is that the HUF must constitute of at least two members, at least one of whom is a coparcener.
As stated, coparceners are normally from among the male members of a family. In Maharashtra, Karnataka, Andhra Pradesh and Tamil Nadu, though, daughters born in a Hindu family are also treated on par with coparceners. In Maharashtra, this is not applicable where the daughter is married before June 22, 1994, in Karnataka if before July 28, 1994, in Andhra Pradesh if before September 5, 1995, and in Tamil Nadu if before March 25, 1989. Assets may also be transferred by way of gift to the HUF whereby the income arising will be assessed in the hands of the HUF. In this context, one must be careful about the provisions relating to clubbing. Where an individual member impresses his property with that of the HUF, the income arising from such property is to be clubbed in the hands of individual. Where such property is subsequently partitioned only the income arising to the spouse of the individual will be clubbed in the hands of the individual.
If you are a Hindu, have income coming in from more than just salary and you want another tax vehicle to reduce your tax burden, look closely at using an HUF (Hindu Undivided Family) account to do so. Actually just a bank account, an HUF is another tax head that can be used to receive income (under certain circumstances) to lower the overall tax burden on a family. What is an HUF? Under the Income Tax Act 1961, the HUF has been designated the status of a distinct tax entity, and so the income earned by an HUF is assessed to tax as a separate person. This enables an HUF to enjoy much the same tax breaks as an individual. An HUF allows an individual to reduce his tax liabilities as he can divide his income into two distinct assessment units: as an individual and as the karta of his HUF and enjoy the tax breaks under two distinct capacities. The corpus of an HUF consists of: ancestral property, property acquired with the aid of ancestral property, the property transferred by its members to the pool of the family property or gifts received by the HUF and accretions thereto. Logic of an HUFThe original reason for having a separate tax entity for ancestral property and common family assets was to take into account the income received by a Hindu joint family, an entity consisting of persons lineally descended from a common ancestor, their wives and unmarried daughters, who are staying together: ?joint in food, estate and worship?. Today the HUF is being used even by nuclear families ? husband, wife and children ? who open and operate an HUF account and get a legal way to reduce taxes. An HUF consists of a karta, the senior most male member of the family or the manager of the joint family property, coparceners (the son, grandson and the great grandson of the karta who acquire interest by birth in the joint family property) and the members, including female members as well as distant blood relatives in the male line. As the name implies, a single person cannot be an HUF, but a husband-wife can. A female member cannot become the karta of HUF, however, after the last male member dies, HUF may consist of female members only. Despite the name ?Hindu?, the tax law applies to Jains, Buddhists and Sikhs. What prompted you to open an HUF account? I have ancestral property and opening an HUF worked to my advantage as I could channel proceeds from the property to the HUF. As the HUF is treated as a separate entity, it helps me reduce my tax burden. But you have to file separate returns. Isn?t this tedious? In the case of an HUF, the pros outweigh the cons. After the Budget 2005, Section 80C allows Rs 1 lakh of deductions from taxable income due to investment in specific instruments, this means I can reduce the total taxable income by Rs 2 lakh by using my HUF account. Will you continue with it? Yes, absolutely. It is beneficial not only for me but for my family. The HUF can go to my family and my legacy can be managed tax efficiently. How to use an HUF? If you have income from more than one source and some of it comes from ancestral wealth or from a common pool of assets owned by a family, you can go to any (public sector, private or foreign) bank and open an HUF account. ?The maximum a banker would ask for is a declaration and a PAN number?, says Sanjeev Kapoor, a Delhi-based chartered accountant. However, an individual can neither transfer his salaried income to the HUF nor gift a sum to it. a transfer of assets is not beneficial from the tax point of view as contributions by a coparcener or a member to the HUF?s property will invoke the ?clubbing provision?, that is the income will not be split across two entities but will be ?clubbed? with the person who transferred it and therefore taxable at the hands of the contributor and not the HUF. But if the HUF re-invests or re-employs the funds, the income generated thereafter will be taxable in the hands of the HUF and not in the hands of the coparcener or member who contributed to the HUF?s property. Not very popular with those who earn just salaries, an HUF is a good option for those in the higher income groups. Says Kapoor: ?HUF is not very popular with the middle or upper middle classes. One has to be a very high income earner to benefit from an HUF.? So, the only one good reason to use an HUF is to reduce your tax liability and those with substantial property income benefit. For people investing in stocks and shares, an HUF does not have much to offer as a flat rate of tax has been imposed on capital gains. Nor are HUFs allowed to park their money in Public Provident Fund (PPF), the risk-free investment option which offers a tax-free 8 per cent interest. In the ?70s and ?80s the rate of income tax was at excruciatingly high levels and forming an HUF gave some respite. Now unless an HUF enables a person reduce his tax liabilities considerably, it does not make much financial sense in undergoing the cumbersome task of filing returns twice.
A sort of note to self consisting of questions to which authoritative answers are desirable:
(1) Is a "Hindu" nuclear family, all members of which are staying outside India as NRIs, a HUF entity?
(2) Do members of a HUF have to be Indian passport holders? What about USC family that is "Hindu"?
(3) Suppose some ancestral property is likely to devolve in future. What steps can be taken (if at all) to ensure ancestral property devolves to HUF, instead of to individuals?
(4) If "Karta" of HUF wants to ensure his wife/daughters get a proper share (and not just his sons), what steps should he take to protect the interests of female members, while still taking advantage of HUF?
(5) What types of assets are ideal for HUF ownership?
(6) What is the difference between specified HUF and HUF - tax rates for the two seem to be different with higher rates for specified HUF?
(7) What is the state of residence (within India) of a HUF, when not all members live in that state, and not all property owned by HUF is located in that state? Place where Karta lives? Place of property? Place where HUF account is opened? Which state's laws will apply?
HUF rules say that if the member of the family gifts to HUF account then the clubbing provisions apply.
How does this 'clubbing provision' work if a family member gifts to HUF when that family member is an NRI?
In other words, can one gift to HUF when they are NRI to avoid the clubbing provisions? Would appreciate if anyone has thoughts on this clubbing provision and how it works.
Here is my belief. Income from the asset gifted to HUF by HUF member (even if HUF member is non-resident) is subject to being clubbed with income of HUF member. HUF member or any individual (even if non-resident) is subject to GOI tax on income from India sources. However, not every relative of members of a HUF is necessarily a member of that HUF.
It seems like gifting non-productive assets to HUF would be a good way to avoid the "clubbing provision" (since there will not be any income from those non-productive assets), and to avoid any future wealth tax issues.
This could specifically work if someone wants to invest in more than one plot of land.
Bobus175 (Original Message)Sent: 2/8/2006 3:07 PM