Our valuable client asked us:-
Question. I am a salaried employee and want to purchase a flat for my residence. From the taxation point of view, will it be advisable to purchase the same in my name or in my HUF’s name. My further query is whether the HUF can charge any rent from me? If so, can I claim exemption from tax allowable under Section 10(13) on the house rent allowance being paid to me by my employer and also whether the HUF will get the standard deduction of 30% u/s 24b on the rental income received by it.
Fundscoop’s expert replies:-
Yes, you can
According to the provisions of Section 10(13A) of the Income Tax Act, any allowance received by an assessee from his employer to meet the expenditure incurred on payment of rent in respect of a residential accommodation occupied by him is exempt from Income tax to the extent as may be prescribed under the statute.
The exemption is granted provided the residential accommodation occupied by the assessee is not owned/co-owned by him and the assessee has actually incurred expenditure towards payment of rent in respect of such residential accommodation.
In your case, you are satisfying both the above conditions and you can claim exemption as mentioned above as per the limits prescribed under Rule 2A of Income Tax Rules 1962.
It may further be noted that the HUF will be liable to pay tax on such rental income and will also get the standard deduction benefit. It is advised that the HUF should charge prevailing market rent so as to avoid any litigation by the tax department.
No, it’s not advised
Complications may arise later, though registering or forming a HUF is very easy.
- At the root of many problems, there is a poor understanding of the laws that govern the HUF’s. There are ambiguities even at the concept level. For dealing in HUF, Hindu Succession Act should be read along with the Income-tax Act.
- Some choose to create a Hindu Undivided Family (HUF) only for the purpose of tax saving, it may work only for the initial years for few people but as income and number of members in the family grows complications also increases. Taxation can also be an issue as Income generated from personal funds put into an HUF will actually be clubbed with the coparcener’s individual income, so the very purpose of tax savings will be defeated. If the income tax authorities get a hint that the HUF has been registered just to launder money or avoid taxes, it may take suitable action against it.
- Partition of real estate belonging to an HUF can be a nightmare - Once a property is purchased by an HUF, all coparceners have equal right to it and it cannot be transferred or sold without the consent of all coparceners. Even the karta cannot transfer it to anyone without everyone’s consent. Further, an HUF cannot be broken into parts. All members have to agree to dissolve an HUF.
- As nuclear families are more prevalent now and divorce rates have increased, this adds to the complications further.
HUF’s can still be a useful tool, but it seems that the cons outweigh the pros.
For getting more clarity in your specific case, please feel free to write to us at info@fundscoop.in Thank You!