Can I transfer 1 crore of my bank balance to my HUF to save tax on FD interest?

I currently fall into the 30% tax slab. I have 1 crore of my money invested in fixed deposits at 7% interest per annum, i.e., 7,00,000, which attracts 30% tax.

I heard that transferring the money to HUF can help us save on taxes. Can I transfer my money to my HUF and take advantage of slab rates?

The income tax department is well aware of the tax avoidance tools that citizens deploy and therefore, we have specific anti-avoidance rules in the tax laws. Section 64 of the Income Tax Act, 1961, states that if you transfer your money to an HUF on which the HUF makes an income, then it will not be considered the HUF's income but your own income.

You might be thinking of some other creative ways, like doing it through your wife, etc., but then there are similar provisions to curb this tax avoidance as well.

To cut things short, the following are the ways in which you can introduce capital in an HUF by being on the right side of tax laws:

Gifts from non-relatives

Only members of an HUF are considered to be relatives of an HUF under Section 56(2)(x) of the Income Tax Act, 1961.

When an HUF receives a gift from its non-relatives, then the income arising from such an asset should be treated as income in the hands of the transferor.

But then what’s the good use when even the capital received as a gift is taxed in the hands of the HUF?

On the first 2.5 lakh of gifts received, there’s no tax in the hands of HUF due to slab rate benefit.

On the next 1.5 lakh of gifts received, a tax exemption can be claimed by investing in instruments eligible for deduction under Section 80C of the Income Tax Act, 1961.

Thus, an HUF can receive 4 lakhs of capital effectively tax free each year.

In fact, a tax of only 5% would be applicable on receipt of another 2.5 lakh since the taxable income would be within 5 lakhs.

Thus, an HUF can receive 4 lakhs of capital effectively tax free each year.

Inheritance

Rather than receiving property in an individual’s name, it may be a better call to inherit estate in an HUF from a tax perspective.

In our previous client story, we discussed how inheriting an estate may be beneficial from an income tax perspective.

An example of the same has been shared below:

S.No.	Particulars	Case A: Without HUF	Case B: With HUF
S.No.	Particulars	Mr. X	Mr. X	X HUF
A	Income Taxable u.t.h Salary	25,00,000	25,00,000	-
B	Income Taxable u.t.h House Property (Rent of 10,00,000 less 30% of standard deduction)	7,00,000	-	7,00,000
C	Gross Total Income (A+B)	32,00,000	32,00,000	7,00,000
D	Less: Deduction u/s 80C	1,50,000	1,50,000	1,50,000
E	Net Taxable Income (C-D)	30,50,000	23,50,000	5,50,000
	Tax liability (old regime) with cess	7,56,600	5,38,200	23,400
	Total Tax Liability	7,56,600	5,61,600
	Tax saving in Case B over Case A		1,95,000

Loan from relatives

A loan from relatives on fair interest terms as per market rates should not be looked up on as a pass through vehicle by the income tax authorities.

This way, even though HUF will pay interest on loan to its members, but the fair interest income will also be charged to tax in the hands of the member.

Can I run a professional services business or commission led business in an HUF?

The Income Tax Department may disregard the income in the hands of an HUF in the case of a professional services business or a commission led business like a mutual funds distributorship or insurance agency, as these businesses typically do not have the involvement of family.

For example, a Chartered Accountant earns professional fees from his clients based on his personal expertise and signing authority. A family can’t be involved in rendering such services and thus would be looked upon as a tax avoidance vehicle by the income tax authorities in case such business is divided through an HUF rather than in an individual capacity.

Disclaimer: Name may have been changed due to confidentiality of the individual. Do consider seeking advice from a qualified tax expert or a lawyer before taking any step.