Income tax: you want to benefit from double deductions on investments, rental income, etc. ? Here is a way

People with high salaries not only have to pay taxes on wage income, but also on investment income as well as rent and other unearned income, etc.

Persons with high salaries must not only pay taxes on wage income, but also on the returns they generate through investments in most financial instruments as well as investments in rental income-generating properties and on these other unearned income.

So how can they reduce tax debt while generating additional income?

Although a physically fit salaried person cannot save much wage income tax after enjoying 80C, 80D, 80CCD(3), etc. deductions, he can enjoy 80C deductions and some other sections income tax. Take action again by forming an entity – called Hindu Undivided Family (HUF) by making investments through HUF and receiving the income other than salary through it.

Dr. Suresh Surana, Founder of RSM India, explains the tax benefits of investing through HUF instead of investing on behalf of an individual.

A Hindu Undivided Family (HUF) is assessed as a separate entity for the purposes of assessment under the Income Tax Act 1961 (hereinafter referred to as “the IT Act”) and further benefits from an income threshold exemption of Rs 2.5 lakh as well as can claim deductions under sections 80C to 80U and exemptions under sections 54, 54F etc. These exemption and deduction thresholds are in addition to those enjoyed by the individual. Thus, making investments through HUF can help reduce tax liability to some extent.

To understand, suppose that,

a. In the first scenario, Mr A has wage income of Rs 30 lakh and rental income of Rs 11 lakh (net of the standard 30% deduction) from immovable property as well as investments in ELSS of Rs 3 lakh.

b. in the second scenario, Mr A has a salary income of Rs 30 lakh and has an ELSS of Rs 1.5 lakh and his HUF has a rental income of say Rs 11 lakh (net of the standard 30% deduction) and in HUF investment of Rs 1.5 lakh is also made in ELSS.

In the scenarios above, the indicative tax levied would be as follows:

Tax comparison.

Thus, there is a significant tax saving of Rs 2,36,600 thanks to the HUF.

Are there any regulatory challenges to investing through HUF compared to individual investments?

“There are no major difficulties, except that HUF is assessed as a separate entity, so establishing HUF would require maintaining a separate bank account in the name of that HUF, applying PAN for HUF, etc. Also, once investments are made in the name of HUF, all co-sharers of those HUFs would acquire a right to the properties/assets owned by HUF,” Dr. Surana said.

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