CREATE HUF - SAVE TAX

The Hindu Undivided Family (HUF) structure is a very effective way to save tax and a lot of people are eligible to create HUFs but can't do because of lack of awareness.

Many a times we feel that creation of HUF requires lot of procedural formalities and lengthy process hence try to avoid it.

I do not know whether marriages brings fortune to your life or not, but from tax aspect HUF is the biggest gift for getting married. 

INTRODUCTION : 

An HUF is automatically constituted the moment a person gets married.Which means a Hindu male needs to do nothing to get an HUF created but to get married to a Hindu female. It is one marriage gift that all Hindus get from the government or Hindu Law. It is not necessary to have children to create HUF.

Sikhs, Jains and Buddhists can also create an HUF under the Income Tax Act even though they are not governed by the Hindu law.

WHAT IS HUF ??

An HUF is a separate and a distinct tax entity. The income of an HUF can be assessed in the hands of the HUF alone and not in the hands of any of its members. The senior most member of the family who manages the affairs of the family is called the Karta. Minimum requirement is of two people (at least one male member)to create HUF.

A coparcener is a member of the HUF, who by birth acquires an interest in the joint property of the family, whether inherited or otherwise acquired by the family.

Coparceners (Member of HUF) have right to claim partition of the HUF. Coparceners consist of a Karta and his lineal descendants within the following four degrees:

• 1st Degree: Holder of the ancestral property for the first time – Karta
• 2nd Degree: Son(s) and Daughter(s) of the Karta
• 3rd Degree: Grandson(s) of the Karta
• 4th Degree: Great Grandson(s) of the Karta

A daughter, after her marriage, would remain a coparcener in her father’s HUF and at the same time, can become a member in her husband’s HUF. In the event of the death of the Karta and in the absence of any male member, two females can continue to run the HUF and the senior female can take over as the Karta. A son can create his own HUF while remaining a coparcener in his father’s HUF.

CAPITAL INFUSION :

Here comes the most difficult part for someone to start the HUF operating – generating capital for the HUF.

One should not contribute his own personal assets or funds into the HUF as any income generated from these assets or from its investment will be clubbed into Individual’s personal income under Section 64 (2) of the Income Tax Act and hence taxed accordingly.

But there is a way out – one can transfer his personal assets or funds into the HUF if the income generated from these assets or from its investment results in a tax free income (like tax free bonds) and hence there is no scope of any tax liability due to clubbing of taxable income.

This tax free income can then be reinvested to earn even taxable income and eventually all of the income would fall out of the clubbing provisions.

Gifts or inheritances meant for the benefit of all the members of a family should be diverted specifically to the HUF. HUFs are liable to pay tax if the value of the gifts taken from the strangers exceeds Rs. 50,000. Though there is a limit for an HUF to take gifts from the strangers, gifts of a higher value can be taken from the relatives, who are not the members of the HUF.

Here is the list of people who fall in the category of relatives:

• Karta’s Wife
• Brother(s) or Sister(s) of the Karta
• Brother-in-law or Sister-in-law of the Karta
• Immediate Uncle(s) or Aunt(s) of the Karta
• Immediate Uncle-in-law or Aunt-in-law of the Karta
• Lineal ascendant or descendent of the Karta or Karta’s wife

A father can also gift money to his son’s HUF but need to specify in the gift deed that the gift has been made to the son’s HUF and not to the son as an individual. Ancestral property can be an asset of the HUF and an income earned on this property can be classified as the income of the HUF. If any of these ancestral properties are sold, the money received on such a sale should be transferred to the HUF.

How to get started with the HUF?

Once there are two eligible family members ready to operate an HUF, the first thing to do is to apply for a PAN card in the name of the HUF and have a separate bank account opened.

For a PAN application, an affidavit by the Karta stating the name, father’s name and address of all the coparceners on the date of the application is considered sufficient as the document proof of identity of the HUF. Also, the identity and address proof of the karta will be treated as the address proof of the HUF.

Then start seeking for gifts or inheritances from relatives or strangers, keep on infusing your own capital, transfer family’s assets/properties to the HUF and do all the possible things that you can keeping in mind the clubbing of income provisions.

(Please ask for format of affidavit if you require by mailing us)

Sections/Provisions under which HUFs can claim Deduction/Exemptions and Save Tax

As already mentioned, an HUF is a separate and a distinct tax entity and just like any other Resident Individual assessee, it also enjoys a basic tax exemption of Rs. 2,00,000. All other tax slabs are also exactly same as for an Individual. Here is a useful link from Bemoneyaware that shows the TDS rates for Individuals and HUFs.

Section 80C: HUFs can claim tax exemption under Section 80C by investing money in ELSS, ULIPs, traditional insurance plans, NSC or 5 year Bank FD with a scheduled bank. Principal repayment on a housing loan taken by the HUF can also be claimed under this section. HUFs are not allowed to invest in PPF anymore.

Section 80D: Members of the HUF can take a family floater policy and make the HUF pay for its premium and enjoy the tax benefit too.

Section 80DD: If any dependant member of the HUF is normally disabled (not less than 40% disabled) and the HUF makes an expenditure for the medical treatment, training and rehabilitation of that disabled member, then the HUF can claim a deduction of Rs. 50K under this section. If the condition is of a severe disability (equal to or more than 80%) then the HUF can claim a deduction of Rs. 100,000.

Section 80TTA: Interest earned on the money deposited in the savings bank account up to Rs. 10,000 p.a. is exempt for an HUF also.

Section 24 (b): Interest on Housing Loan: If an HUF takes a loan for buying out a residential property, it can claim a deduction of Rs. 150,000 in respect of Interest on Housing Loan.

30% Standard Deduction on a Rented Property: An HUF can claim a standard deduction of 30% from the rental income it earns by letting out a property.

Capital Gains on a House Property: Tax on Capital Gains made by selling a house property can be saved if the HUF invests the proceeds into buying another property within two years from the sale of the said property. The money can also be invested in Capital Gain bonds offered by REC and NHAI with a lock-in period of 3 years. The interest income on these bonds would be considered a taxable income of the HUF.

The table below shows how the income of an individual in the 30% tax bracket can be split between two entities to lower the final tax outgo:

Some Other Important Points

• Karta can be paid a reasonable salary for his services of managing day to day affairs of the HUF. The salary will be considered his personal income but at the same time it is deductible as an expense from the books of the HUF.
• Only one member or coparcener cannot form an HUF. There have to be at least two members and at least one male member.
• HUF can keep its normal functioning even with two females after the death of its sole male member.
• The Hindu Succession (Amendment) Act 2005 has given equal rights to male and female in the matters of inheritance as a result of which a daughter now also acquires the status of a coparcener.
• An HUF cannot become partner in a firm but a Karta can.

These were some important aspects when it comes to creating an HUF and everyone, who is eligible to create an HUF and pays taxes, should strongly consider this option as it is a very efficient and good way to save tax.

DISADVANTAGE OF HUF 

"Even if one co-parcener demands the partition of the HUF property, the other coparceners will have to agree even though they may not want a partition," 

If the HUF has only financial assets (stocks, investments, fixed deposits, etc), gold and cash, it can be easily distributed among the co-parceners. But if the assets include immoveable property or a running business, it is not very easy to split them. Ancestral property may need to be sold to give a share to all co-parceners.

Buy Gold at 15 to 20% Discount

Benefit of Investing through GOLD Mutual Fund against Physical purchase

The Table appended below shows benefits of Buying GOLD through Mutual fund as agst. buying trough  Jewelers or Bank. By investing in Gold through Mutual Fund you can save atleast 15 to 20% due to high prices jeweler/bank charges with same purity and additional benefits.

Gold : Is it really safe anymore???

It has been said that gold is the safest currency. That is the reason that if there is any uncertainty in any part of the world gold prices shoot up.We have always considered gold as hedge against inflation and that might be the reason that historically gold prices have moved in tandem with inflation.But in last few years it has broken all its records.

With the modern reality of gold as a speculative financial investment. Gradually, over the last two decades the tradability and liquidity of gold in a paper, financialised form has completely overtaken everything else.This is not the same gold but another speculative asset class which moves up and down depending on liquidity. 

The days are not far when we can see the deepest fall in gold prices which we Indians have never experienced in past.

In a recent article ‘Why stocks beat gold and bonds’ that Warren Buffett wrote last week briefed certain facts about gold.

Buffett explains that Gold belongs to a class of investments that will never produce anything, but whose growing value depends entirely on the belief that someone else will pay more for it eventually. The value of gold has been driven by the fear that other asset classes will lose value and this has driven up the relative value of gold. The only thing that motivates gold investors is that in the future, investors will grow more and more fearful in this manner. As more and more investors come to believe this, their increasing belief appears to confirm the truth of the belief itself for a while. Eventually, the bubble bursts at some point when the supply eventually exceeds the rate at which the belief is growing.

As Buffett points out, in gold’s case, there’s the additional problem of supply. At current prices, the world produces 168 billion US dollars of gold every year. Not just that, it is in the interest of the producers to dig up as much of the stuff as possible while prices are high and rising. The continued rise of gold would require at least that much fresh money flowing into gold investment every year. That’s a pretty large inflow that will have to be kept up if prices are to sustain. It’s true that Indians are at the forefront of the efforts to sustain this. We appear to absorb an amazing 30 per cent of fresh production every year, and thereby do huge damage to the country’s current account balance.

Back home in India the biggest problem our government of High current account deficit is also a result of our love for this asset. On the current account deficit (CAD), analysis of the current & capital accounts throws up the following: 

Gold and silver imports stood at 10.1% of commodity-wise imports in FY11, lower than only petroleum products (30.1%) and capital goods (20.3%). For FY11, India’s current account deficit stood at $44.2bn, (-2.6% of GDP), the highest in last 4 years. Gold and silver imports were $38.5bn, nearly 87% of the absolute CAD of FY11. Minus gold imports, CAD was very low at -0.4%. 

As an investor It would mere foolishness to consider that total gold assets of the world till date of $9.6 Trillion (At a price of $1750/Ounce) can replace global economy of approx.$200.00 Trillion. 

At one point in time world would agree for some alternate ways for valuing currency, and reduce dependency on Gold.

As an financial planner I feel gold can't be ignored as an investment class, but should be limited to the %age of Security or liquidity required at any given point in time plus additional requirement for child's marriage or personal consumption.

Misleading Advertisment of SBI Bank FD

Be cautious of misleading advertisement published by SBI in all leading news paper showing annualised yield of 17.77% on 5 Year tax saving Fixed deposit.
 

It considers investor to be in the highest tax bracket and also that 80C limit of Rs.100000.00 is not exhausted. It also doesn't consider taxability of interest earned.

PPF is still a better option if you wish to invest for tax saving as the interest earned would by 8.6% (subject to change every year but much better then SBI FD) as compared to tax free interest of above FD i.e 6.39% (9.25 less 30.9% of 9.25%)

Be a Lazy Investor - Saving Interest deregulated

Last week RBI came out with one of the historic decision in Indian banking history by freeing the savings bank rate. It did came out like a Diwali gift from RBI governor.I think every bank account holder would feel delighted with this decision.

Within hours of the Mr.Subbarao's announcement two of the private banks came with an advertisement about increase in Saving interest rate of full page in leading national news paper.

No doubt it will create a big hole in the profitability of some of the big banks balance sheet. But, will it really benefit account holders?

Let us evaluate:

If your average balance in a saving account remain at a level of Rs.1.00 Lac, you would get richer by Rs.166 per month and for balance more then Rs.1.00 Lac additional 50 basis points.

I think for an Lazy investor who holds such big balances in his savings account is not bothered of getting Rs.166.00 or Rs.500 per month. If he would have been really concerned might have shifted his money to Liquid funds offered by mutual funds.

These are the funds favorite with corporates but retail investor were never keen to invest in it. Liquid funds can easily fill in the gap between saving bank account and bank FD's. It gives you return more than saving account (Presently in the range of 8.5 - 9%). The only difference is you can access funds at 1 day notice i.e liquidity is available to you in 1 day instead of instantly in case of Savings account.

From safety perspective although it also bears the tag line "Mutual fund investment are subject to Market read offer document.....". But history of the fund prooves that it is as safe as your savings account the NAV of a liquid fund has never been negative for a single day in its history.(As it invest in the papers of maturiy less then 90 days)

So, as an investor if you are looking at the better returns then Saving bank should shift your surplusses to Liquid funds instead of settling at 4 or 6% of saving account returns. Additional returns can take care of your monthly telephone bills and LPG cost or a weekend with your family.

RETIREMENT - Aish or Without Cash

As an Indian we feel really proud to be one of the youngest country. But, there was time in 80's and 90's when the biggest worry for our country was rising population and because of that reason we started the campaign "Hum do Hamare Do". Today the same worry has become one of the biggest boon for our economy. 

Thanks to one of the report made by Goldmann Sachs way back in 2002 which brought this fact to limelight and resulted in biggest rally in the history of Indian equity market.

India has more than 50% of its population below the age of 25 and more than 65% hovers below the age of 35. It is expected that, in 2020, the average age of an Indian will be 29 years, compared to 37  for China and 48 for Japan.(source : wikipedia.org)

Population by Age and Sex for India
Year	Age	Both Sexes Population	Male Population	Female Population
2011	Total	1189172906	617039156	572133750
2011	0-4	118325346	62740231	55585115
2011	5-9	117592252	62539569	55052683
2011	10-14	116948795	62170835	54777960
2011	15-19	112247754	59507362	52740392
2011	20-24	105137174	55103535	50033639
2011	25-29	99548997	51787772	47761225
2011	30-34	93102734	48164565	44938169
2011	35-39	86435208	44407222	42027986
2011	40-44	76764881	39235679	37529202
2011	45-49	64989219	33146269	31842950
2011	50-54	54272103	27595085	26677018
2011	55-59	44170733	22361010	21809723

 SOURCE : U.S.Census Bureau, International Data Base.

There is no doubt India is going to be one of the strongest economy inspite of all the global, political or domestic factors.

But while looking at sparkling and shiny picture we forget there is one more fact hidden in the above data, From the above data it is clear that in next 25-30 years almost 50% of our present population would enter retirement.

For an average human being retirement age means to depend rest of his life on retirement corpus created during working span of his life. Just to understand effect of Inflation on our household exps.(inflation@8%) The cost  of present household exps. valued at Rs.25000 per month would become Rs.251000 PER MONTH after 30 years and would be Rs.1175000 PER MONTH  i.e 1.41 CRORE PER YEAR after 50 years. It really seems funny to talk of 50 years. But it is the fact of life for youngsters who are in 25-40 age group and should be eye opener for them to reconsider the amount of funds they might require in retirement age.

 

Future value of Exps. @8% Inflation rate

Post Independence the average age of an Indian was in the range of 50-55 years. But due to improved medical facilities and newer technologies it has gone up to 75-80 years(in urban India) and don't be surprised if it moves up to 95-100 years in next 30 years.

We need to seriously consider our retirement planning at an early age of our carrier or as soon as we realise its need. The biggest factor which can help us in accumulating such a bigger corpus is power of compounding and proper asset allocation.

Illustration: Let us consider that Shahid Kapoor is an young, dynamic IT employee whose age is 30 year. He plans to retire at age of 58 and he considers his expected life to be 90 years. His present household expense is Rs.25000/month and considers it to be same even after the retirement age. He feels inflation pre and post retirement to be 8%.

Now, considering above his house hold expenses at the age of 58 would be Rs.2588132.00/Year and if he manages to get return 2% more then the inflation rate post retirement i.e 10% (Net of Tax). He would need to have a retirement corpus of 6.32 Crore.

Particulars	Amount
Total Monthly Expenses	25,000
Total Annual Expenses	300,000
Inflation	8.00%
Current Age	30
Retirement Age	58
Life Expectancy	90
No. of Years for Retirement	28
Expenses in the First Year of Retirement	2,588,132
Retirement years (life expectancy-retirement age)	32
Inflation during Retirement Years	8.00%
Investment Returns on Retirement Corpus	10.00%
Net Returns	1.85%
Retirement Corpus Required	63,216,858
Deficit (Corpus Required-Assets Utilized)	63,216,858
No of Years for Retirement	28
Expected Investment Returns	15.00%
Lumpsum Funding Required (If Available)	1,262,680
Monthly Investments Required	12,352

It seems to be impossible to accumulate the above amount during the working tenure of 28 years for an average person. But it requires much lesser then the EMI you pay for your Sedan (car) , expecting a return of 15% you require to invest just Rs.12352.00 per month. So delay your purchase of car or house by 3 or 5 years and safeguard your retirement.

As there is no social security system available for citizen of India we need to plan and protect our retirement life ourselves. Many of Central or State government or employees Covered under EPF feel relaxed that their retirement would be taken care of by there EPF account. Just showing below the value of EPF account of Mr.Shahid Kapoor present salary Rs.35000/Month and expects to appreciate 10% YOY.

Sr. No	Particulars	Values
1	Current Age	30
2	Retirement Age	58
3	Monthly Salary (Basic+DA)	35,000
4	Increase in Salary	10.00%
5	Contribution from Salary	12.00%
6	Current EPF Balance	0
7	Rate of Interest	8.50%
8	Value at Retirement	33,559,758

So, the deficit for retirement fund is huge even after considering the EPF maturity.

Although modern medical science has increased the life expectancy but has increased medical expenses substantially.What if someone meets up with some of the critical illness or might result him to be bedridden during his working tenure or Retirement age.

Now a days it's easily noticeable that in every household there is atleast one of the family member who is taking medicines on daily basis.That too 2-5 pills a day.

It is the high time that we should give priority to retirement planning , otherwise it can happen that today we are moving in a luxurious car or living in a bigger house but after retirement might need to move to a smaller house or settle for an economy car or even need to cut down on statutory house hold expenses.

Remember, if planned properly retirement life can be the golden period of our life as these is the only period when we would have ample time and if have sufficient money can do everything which we couldn't do during working span due to job, aspirations or family commitments.

SO PLAN YOUR RETIREMENT TODAY ONLY AND HAVE A GREAT LIFE AHEAD