Consider a scenario where in I form an HUF for my family and, me and my wife contribute say 1 lakh each as a capital to HUF. I understand the clubbing provisions will come into effect. Now say those 2 lakh earns 1 lakh and gets reinvested and earns another 1 lakh(i.e. 3 lakh earning 1 lakh). Now from income tax point of view, this profit of 1 lakh is taxable in the hands of Me, My wife and HUF equally. Is my understanding correct? If yes, is it the same applicable to NRI families?
My grandfather-in-law (80 year old) has an HUF account in which he is the Karta and his wife and daughter-in-law are the only other members (his son passed away last year). In case something were to happen to him, who can now become the Karta of this HUF? I want to be prepared for this eventuality in advance and take actions now in case this creates complications later. Can you please advice on who can become the Karta after him? Also, what sort of documentation would be required in advance for this?
As you are a member of the HUF, any shares that you transfer to the HUF in the form of a gift will not be taxable in the hands of the HUF. However, when the shares are sold, the capital gains will be clubbed with your income.
When an HUF is formed, the members can pool capital in the HUF and transfer money as a gift. Gifts from members are exempt in the hands of the HUF and the HUF can use this capital to generate income, clubbing will not be applicable here. You can provide loans to the HUF as well, but in that case It is not ideally recommended to give interest-free loans. You can charge a minimum interest as prescribed by the RBI.
Hullo!
I have read somewhere (a legal forum) wherein a High Court ruling was quoted to effect that, in the absence of a male Karta, the senior most female coparcener can take over the duties of Karta.
As for documentation, best if you seek legal advice.
I would image the original HUF deed indicating all coparceners/members and the relevant Death certificate.
A notarised document signed by the current Karta and all members nominating the next Karta + who will handle the bank acct may also help reduce subsequent red tape.
I can’t help but observe that you come up with interesting questions. (Example - some time back you wrote about the possibility of using 2 trading accts (is that correct, it was not clear) to take advantage of dividend/bonus stripping but did not explain exactly how?) Still not too late… so please do!
Coming to this question, responded to by Shrutika. Curiosity overtakes, so permit me to join in and ask her and other experts on the forum:
It is understood that all expenses related to trading are permissible. So salary of an employee who assists in trading is deductible. But then, what about ancillary expenses directly related to expenditure on the employee? (Here, I confine myself to reasonable and acceptable expenses that an employer of a small business may be expected to bear of an employee.) And, if an employer is noble enough to offer medical insurance as well, why ever not!?
I know this sound like scrounging and miserly but more to the point is it admissible?
If nothing specific is given in the rules, a lot will depend on the Taxman in the Tax Dept who scrutinises the ITR. As I see it if, at the end of all such shenanigans one is still paying tax to the Govt, it may be overlooked. But if, the end result is that you pay no tax or claim losses to be adjusted in future, it may not go down well with the IT authorities.
Yes, your observation seems valid. When you report trading as your business, just like any other business, the expenses that you incur wholly w.r.t trading are allowed as a deduction. Moreover, you are also required to maintain books of accounts which should also have a record of all such expenses. Now, while the ITD does not ask for any proofs while filing the ITR, they can ask for clarifications in case of scrutiny and one will have to justify all of the expenses that they have claimed. Moreover, then it will depend on the department that whether they find those expenses legitimate.
If I transfer funds from my personal bank account to HUF and then those funds generate income say FD interest, will clubbing be applicable here or I can take tax benefit ?
Also, can I transfer dividend yielding shares from my personal demat to HUF’s demat account, again will clubbing of income be applicable here or I can take tax benefit ?
There could be different views on how clubbing provisions apply in the case of HUFs. As per our understanding,
An HUF can build a corpus at the time of incorporation. Any capital raised and contributed at the time of incorporation is treated as HUF’s capital and clubbing provisions shall not apply. Hence, the interest generated from FDs will not be clubbed.
However, if the members transfer any personal movable/immovable property to the HUF, any income generated from the property will be clubbed. As shares are considered movable property, if you transfer them to the HUF, any income generated will be clubbed in the hands of the member.