Can I benefit from HUF by splitting income?

I am a retired employee and my total income is approx 15 lakh per annum. That includes his pension 6 lakh, LIC pension of 1 lakh, rent from house property of 2.4 lakh and interest income from fixed deposit for the balance. I benefit from an additional 1% as a former employee and 0.5% as a senior citizen. I am also getting 8.2% on the Senior Citizens Savings Scheme. If I open a HUF (Hindu Undivided Family) account and transfer my fixed deposits to my HUF account, will I still get the additional benefit of 1.5%? Is it advisable to open a HUF account? If so, how should I divide my income to claim tax benefits?

— Christian

Banks offer higher interest on fixed deposit to their ex-employees and the HUF cannot be treated at par with the ex-employee of the bank and hence the same benefit will not be available to your HUF.

Gifts received by an individual or HUF are not treated as income as long as the aggregate value of gifts from all sources does not exceed. 50,000 in a year but once the threshold is crossed the full value of the gifts is treated as income.

However, gifts received from specified relatives are not treated as income even if the value exceeds 50,000 in a year. HUF members are treated as their relatives and hence there will be no tax liability at the time of transfer of fixed deposits transferred to your HUF.

Income earned on assets transferred by members to the HUF is clubbed in the hands of that member year after year until complete division of the assets of the HUF takes place after which clubbing applies to the share of such asset allotted to separation. The club will continue to apply even if the asset is converted into any other asset.

So, by transferring your fixed deposit to your HUF, you will not be able to reduce your tax liability as the income arising from HUF in your hands will still be taxed. Please note that the clubbing provisions apply only to income arising from the asset so transferred and do not apply to income arising from the further invested income which has already been clubbed. So, prima facie, it seems that the purpose of saving tax by transferring the fixed deposit to your HUF will not be served. However, give a gift of money to your grown children who are taxed at a lower rate than you.

Balwant Jain is a tax and investment expert based in Mumbai.

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Updated: 13 November 2023, 11:22 PM IST

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