How to create HUF Capital
The HUF (Hindu Undivided Family) is a separate entity for tax purposes, formed by multiple family members, which allows them to pool their income. By forming an HUF, you can considerably lower your tax liabilities through claiming separate deductions.
The head of the HUF is known as the Karta and is typically the eldest male relative, while the other coparceners or members include sons, daughters, daughters-in-law, and wives. HUFs have their own PAN cards and file tax returns independently of their members. However, to create an HUF, you will need to infuse capital into it. Here’s a guide to the same below.
What is HUF Capital?
HUF capital refers to the initial asset pool contributed by all family members or the fund that legally belongs to the entity. It is managed by the Karta or head of the family for the benefit of all members.
Also Read : What is HUF & Benefits?
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Legitimate Sources of HUF Capital:
If you were wondering how to create HUF capital, here are some legitimate sources that can be employed for this purpose:
- Inheritance from ancestors
- Gifts received from non-family members, within applicable limits. However, the aggregate value must be less than ₹50,000 in a financial year to be exempt from taxes. There is no limit for gifts received from family members.
- Income from the joint family property
- Gifts received at the time of marriage (fully exempted from taxation). However, gifts received at the time of the daughter's marriage are taxable and not exempt.
- Gifts received from members of the HUF may generate income, which will be clubbed and taxed in the hands of the members giving the same. Yet, if this income is invested in various tax-free instruments, then the members giving these gifts will not have to bear the additional tax liability. Upon maturity of the investment, HUFs may invest the funds anywhere, and the income will not be clubbed.
Capital created through income earned:
- HUFs may earn further income and generate more capital from the initial capital that they create.
- They can earn income from various sources, which helps create more capital.
- Some sources include business investments in real estate, shares, mutual funds, rental income, fixed deposits, and other similar investments.
- The income earned by the HUF will be taxable at the same slabs as individuals, with all applicable deductions and exemptions also in effect.
- If the turnover of the HUF exceeds the limit specified in Section 44B, an audit must be conducted by a registered chartered accountant.
Conclusion
Now that you know how to create HUF capital, it is time to consider setting up this entity with your family members, in accordance with the prevailing regulations for the same. It may be an efficient way to pool your joint assets and manage them more effectively while also leveraging several tax-saving opportunities simultaneously. The best part is that all family members have another avenue for deductions or exemptions, in addition to their tax benefits. It may help you conserve family wealth and significantly lower your tax liabilities in turn.