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16.  Creating a New HUF (Hindu Undivided Family) Can Save You Tax – How ?

It is usually believed, that in view of the various amendments to the Income Tax Act, several restrictions have now been placed on the formation of a Hindu Undivided Family (HUF). Thus, from the point of view of tax planning, it is not possible for a Hindu Male to add his self- acquired property into the common assets of the HUF. This is because transferring self-acquired property to the HUF would not be considered the property of the HUF. Instead, any income arising thereof would be added to the total income of the Karta who has transferred his self- acquired property to the HUF.

While an earlier tax planning method, partial partition of an HUF, has been stopped with effect from 1.1.1979, it is still possible to create a separate HUF file in the case of a Hindu tax-payer in the following two ways:

First, where a Hindu male receives certain ancestral property on the full partition of an HUF (or partial partition of a HUF prior to 1.1.79), he can get the status of a new HUF for such property.

Secondly, if his separate branch of the Hindu Undivided Family, consisting of himself, his wife, sons and daughters, gets a special gift from the father or mother of the Karta and the gift is especially earmarked for the HUF only, a separate status can be claimed as HIJF. Special care has, however, to be taken in the drafting of the gift deed or the document evidencing the gift by the parent for the benefit of the said HUE It would be possible for the Karta of such a Hindu Undivided Family, to have a separate income tax file in the status of HUE in respect of the income from the gifted amount and also from business or property, etc., if any, done or acquired with the help of such gifted amount and loans taken by the HUF
Under the provisions of the Income Tax Act, it is obligatory for a person responsible for paying any interest, dividend, salary, etc. to deduct income tax at source in certain cases. One such provision in Section 194A of the Income Tax Act, applies to a person responsible for paying any interest, other than “interest on securities” to residents. He has to deduct income tax at source at the rates of tax in force. The income tax has to be deducted either at the time of payment thereof in cash, by cheque or draft etc., or, at the time of credit of such interest income to the account of the payee, whichever is earlier. However, there are certain situations as laid down in the said section, where no income tax deduction has to be made. One such important condition is that where an individual or a Hindu Undivided Family, receives loans or incurs borrowings and pays interest to any resident person, he or it should not deduct any income tax thereon in respect of interest so paid or credited. This is a very useful concession available to a Hindu Undivided Family. Hence, from the point of view of tax planning, the HUE can be utilised by tax payers in arranging loans or borrowing, either in one’s own name or in the name of the Hindu Undivided Family, so that the various legal formalities connected with the deduction of income tax at source on interest and the furnishing of various statements and returns in respect thereof are avoided. The convenience and time saved ultimately result into tax saving as well. In case the HUF is subjected to Tax Audit, then it would be duty bond to deduct tax at source on interest income and other incomes subjected to TDS. Thus, another advantage of separate HUF is not the same come be utilised to pay interest on loans without the prediction of TDS.

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