In our exclusive coverage of HUF’s, we have previously explained How HUF’s help in saving taxes and how to create a HUF and in this article we would be focussing on How to create HUF Capital by putting money in HUF.
How to create HUF Capital
There are certain ways through which HUF Capital can be created and some of the most popular methods to infuse capital in a HUF is by receiving gifts in such a manner that they don’t attract any tax. Some of the most effective and popular methods of creating HUF Capital by receiving gifts without attracting any tax are:-
1. Gifts from Relatives of the Members of HUF
As per Section 56(ii) of the Income Tax Act, gifts received from the relatives of the members of HUF are fully exempted from the levy of tax. As gifts received from relatives of the members of HUF is fully exempted from tax, receiving gifts from Relatives is one of the most popular and effective ways of creating capital of the HUF.
2. Gifts received at the time of marriage
Gifts received at the time of marriage of any member of the HUF are fully exempted from the levy of Income Tax. However, gifts received at the time of marriage of daughter are not exempted and are taxable.
3. Ancestral property
Your ancestral property is not only your own and belongs to the whole family i.e. the HUF. The Ancestral property can be transferred to the HUF to create capital of the HUF.
4. Aggregate Value of Gifts is less than Rs. 50,000
If the aggregate value of gifts received from any person during a financial year does not exceed Rs. 50,000, then this whole amount is exempted from levy of any tax. There is no limit on gifts received from family members and this limit of Rs. 50,000 is only for gifts received from non-relatives.
5. Gifts received from members of the HUF
If a gift is received from members of the HUF, then the income generated from these funds would get clubbed and taxed in the hands of the member making the gift. However, if this income is invested in tax-free instruments, the members making the gift will not have to bear extra tax burden as the income is already tax free.
And on maturity of this instrument, the HUF can invest the money anywhere and in any way in which it likes and the income won’t be clubbed. In other words, Income generated from Income won’t get clubbed.
- Recommended Read: 8 ways of earning Tax Free Income
Capital created by HUF through Income earned
From the capital created by the HUF, it can earn further income and generate more capital. The HUF can earn income from all sources (except Salary) and the income so earned would help the HUF create more capital. Some examples of sources from where a HUF can earn more income are:-
- Through any Business
- Investing in Shares and Mutual Funds,
- Investing in Real Estate
- Investing in fixed deposits
- Through Rental Income
- Various other sources
The income earned by the HUF would be taxable as per the Income Tax Slabs and the HUF is also required to file income tax returns just like Individuals. All income tax deductions are also available to HUF just like they are available to an Individual.
Moreover, if the turnover of the business of the HUF is more than the limit specified under Section 44AB i.e. Rs. 25 Lakhs/ Rs 1 Crore, it would also be required to get an audit conducted by a Chartered Accountant.