HUF could be formed by two members, at least one among whom should be a male member of the family.
Senior most male member of the family would become ‘Karta'. Although it is governed by the Hindu law board, it can be formed by Jains, Sikhs and Buddhists as well.
How it works?
Although Salaried individual cannot divert his salary income into HUF, he can get a leverage if he plans to earn additional income and can do it in the name of a HUF, thereby reducing his taxable income.
Suppose, an individual has a salary income of Rs. 12 Lakhs and is earning additional business income of 6 Lakhs.
Now, if he creates an HUF and does business in the name of a HUF, then this total income will be taxable under HUF and he could reduce his tax liability after availing benefits under various sections which would otherwise not be allowed, had he earned it in his own name.
Apart from above, below are additional non-exhaustive techniques of reducing tax liability through HUF.
1) Rental Income from a property
Rental income from a property could be received on behalf of a HUF instead of an individual account.
2) Business Income
Profits generated out of the family business, in the name of a HUF, shall be taxed accordingly and exemptions will give more leverage on tax saving.
3) The remuneration to Karta and members
Remuneration to Karta and other family members is an allowable deduction from income of an HUF.
4) Loan to HUF members
If the business, capital or investment of the HUF is expanding, then such expansion can be done in the individual names of the members of HUF by giving loans to the members from the HUF.
The HUF may or may not charge interest on the loans given.
5) Family Settlement or Arrangement
The sole purpose of the family settlement should be to settle existing or future disputes regarding property, amongst the members of the family.
Since this arrangement does not involve transfer, it would not attract gift tax, capital gains tax or clubbing. In a family arrangement, tax incidence is considerably reduced or it may even become nil.