Question – I have a small family with my wife and a daughter. I wish to know whether i can form a HUF or not? Also how can i create capital in the HUF – if by gift proceeds from near and dear ones, what will be the tax implications for the same?
Answer – Dear Friend, No matter ur child is a daughter or a son, Ur HUF was already formed by the day u married. What u r asking for, “I wish to know whether i can form a HUF or not?” is simply to form capital in ur HUF.
As HUF is a virtual Tax identity, there can’t be any blood relatives of an HUF. Hence zero Tax on Gifts received from Blood relatives can’t be claimed. For first year, as no capital is there, no income ‘ll accrue to HUF, hence in first year, u may receive a maximum of 2.5L Rs. as gift from ur near & dear ones. out of this 2.5L Rs. invest in 80C instruments, mainly ELSS to get money early as lowest lock in period is there of 3 years. After investing in ELSS, ur HUF’s net taxable income ‘ll be 1.5L Rs. only in the current FY. It ‘ll be fully tax-free.For every following year, receive Cash gifts only upto the limit that HUF’s total income from other taxable sources & gift remains under 2.5L Rs.
One interesting part is, ur HUF may receive gifts in kinds of any valuation from ur near & dear ones. For example u open a demat acct. in ur HUF’s name. Now ur relatives & friends gift ur HUF, Eq. shares worth of 20L Rs. under gift. Ur HUF may sell these shares immediately to have liquid cash. The most interesting part of this, “Gift in Kind” strategy is ur HUF can claim tax free LTCGs for these Eq. shares, if the total holding period of these shares including original holder’s (the doner) holding period is more than 1 year & shares r sold thru Stock exchanges & STT is paid on sell.I hope the above info may be of ur help.