How to save taxes by forming an HUF

Earning a decent livelihood in a metro city is not easy. Varun knows this, which is why despite having a full-time job as a content writer, he does freelance work as well. His wife had to leave her job after the birth of their child, so it was up to Varun to take up freelance assignments and make sure that they had more than one source of income.

But the problem arose when Varun started to earn a sizeable amount from his freelance work and it was added to his taxable income. His tax liability increased and with it his endeavours to save taxes. But as an individual taxpayer, he could save taxes only to a certain extent. He had the Rs 1.5 lakh 80C limit and a few other ways to save taxes, but beyond that he had no option but to pay taxes. That was until he found out about forming an HUF to avail additional tax benefits.

What is HUF?

HUF stands for Hindu Undivided Family. An HUF is recognized as a separate entity under the Income Tax Act and enjoys all the tax benefits that an individual taxpayer has. Hence, for someone like Varun, the same tax benefits can be availed twice after the formation of an HUF.

An HUF is formed automatically at the time of a Hindu marriage. An HUF can have the male head of the family, along with his wife and/or children. Only two family members are required to form an HUF. And once the HUF is registered, it is recognised as a separate entity for the purpose of taxation. An HUF gets its own separate PAN card as well.

Tax benefits on HUF

How Varun used the formation of HUF to his advantage was by earning his freelance income under the HUF. That way, his income was split between two entities–salary income being earned under his name as an individual and his freelance income being earned under the name of his HUF.

The advantage of this was that he could avail all tax-saving benefits on investments, payments and expenses for both himself and his HUF. For example, he could invest in ELSS funds to save taxes in his name as well as in the HUF’s name and avail the 80C benefit twice. This meant less taxes to pay, more tax savings and higher amount of investments to help meet long-term goals.

This tax benefit of forming an HUF is something that not a lot of taxpayers know about. The benefit of HUF can be availed by Hindus, Buddhists, Jains and Sikhs. When tax-saving needs to go beyond the various section 80 deductions, forming an HUF can come in more than handy.

This article was also published on Yahoo Finance on 13 April 2016.

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