Hindu Undivided Family (HUF) as the name suggests is a joint family, which consists of all members lineally descended from a common ancestor, their wives, and children, both sons and daughters, and headed by Karta who is typically the eldest person or head of the family. In addition to Hindus, even Jain, Buddhist and Sikh families can create HUF and avail the tax and other benefits out of it.
Who is Eligible for HUF?
All members of your family, including your spouse, your children, their spouse and children can be part of your HUF. The eldest male in the family is known as the Karta and all others are known as coparceners (usually men) and members (usually women).
How is HUF Taxed?
Hindu Undivided family is treated as “a person” under the Income tax Act, 1961, and therefore treated as a separate legal entity for the purpose of tax liability and assessment.
For families with ancestral properties and business, they can register as a HUF and obtain a separate Permanent Account number (PAN) in the name of the HUF. This helps to bring down the family’s tax liability as the income earned from the assets and businesses owned by the HUF are assessed separately. For taxation purposes,
- HUF can claim most deductions available to individuals like those under Sec 80C, Medical Insurance etc.
- HUF can pay salary to its members and salary income can be deducted from the income of HUF in order to reduce the tax liability.
- A HUF is taxed at the same tax slabs as an individual
Benefits of HUF
The primary aim of forming an HUF is to create a separate legal entity and avail benefits of an extra PAN card legally. As the income of the whole family is not taxed in the hands of any individual , a new PAN card is allotted to the HUF and tax would be paid by the family using the PAN card, thereby resulting in tax savings and reducing the tax liability.
Owing a house
Under Income tax laws, if a person owns more than one self-occupied property, only one of them can be claimed as a self-occupied property
However, A HUF can own a residential house without having to pay tax. In addition, it can also avail of a Home loan to purchase a residential property and get tax benefits up to Rs 1.5 lakh under Section 80C and for loan repayment and up to Rs 2 lakh for interest thereon.
A HUF is eligible to claim tax benefits in respect of payments related to Life insurance during a year. For example, an HUF can pay Life Insurance premium for individual members, and claim tax benefits under Section 80C. The maximum amount that can be claimed as a deduction under this section is Rs 1.5 lakh.
Tax Saving Investments
An HUF is allowed to make investments in tax-saving Fixed Deposits and Equity Linked Savings Scheme (ELSS) and avail tax benefits of up to Rs 1.5 lakh under Section 80C. It can also claim tax deductions for the amount deposited by the HUF in respective PPF accounts of its members.
Illustrating it through an example :
|Income from Various sources||Income of Mr X. before formation of HUF||Income of Mr X. after formation of HUF||Income of HUF|
|Salary||₹ 25,00,000||₹ 25,00,000|
|Rental Income||₹ 5,00,000||₹ 5,00,000|
|Interest on Property deposit||₹ 6,00,000||₹ 6,00,000|
|Standard deduction on property||₹ 2,00,000||₹ 2,00,0000|
|Total Taxable income||₹ 38,00,000||₹ 25,00,000||₹ 13,00,000|
|Section 80C exemption||₹ 1,50,000||₹ 1,50,000||₹ 1,50,000|
|Net taxable income||₹ 36,50,000||₹ 23,50,000||₹ 11,50,000|
From the above example, we can clearly see that by splitting the income between the individual and the HUF , the annual tax income reduces. The reason behind this :
- Mr X gets the benefit of Section 80C twice. This helps in reducing his tax liability
- Also due to income split, the HUF got into lower tax bracket, which lead to further relaxation in overall tax liability
Steps to Create a HUF
One can create a HUF in three simple steps. They are;
Create HUF Deed
An HUF Deed is a formal document on a stamp paper which has details of all the members; the Karta (eldest member), the coparceners and the members of the HUF.
It contains a declaration from all the members of the HUF stating that the Karta has the authority to transact all the accounts of the HUF.
It contains details of the capital with which the HUF was formed. The capital usually is in the form of ancestral property of gift received from the forefathers, father etc.
Application for Separate HUF PAN Card
We already know that the Income Tax Act treats the HUF as a separate legal entity. The act requires that the HUF has its own PAN number. Every HUF needs to apply for a separate PAN card and file its taxes independently every year. The tax slabs applicable to an individual are also applied to a HUF.
Open a Separate HUF Bank Account
All financial transactions related to the HUF need to initiate separately through a HUF bank account. It is mandated that the HUF make and receive payments independently and also maintain records. An HUF is required to have a Rubber Stamp with the name of the HUF in it. All important documents need to be stamped and signed by the Karta of the HUF.
Caution With HUF
Though HUF seems a perfect and an easy way to save tax of a family, it suffers from few drawbacks as well :
- The common property under the HUF is not transferrable and cannot be sold without the approval and acceptance of each and every member of the HUF.
- One of the biggest drawback of HUF is the distribution of assets in case of partition and dissolution of an HUF , which may lead to a lot of disputes and legal problems among the family members
HUF can be a great option for those who have some ancestral property and for persons with sufficient income and savings, as they can avail a great amount of tax benefits out of it. However a person must make a calculated decision according to his own risk appetite and business requirements in order to keep up with his long term business goals. Connect with our Fee Only Financial Planner to understand the benefits of HUF taxation.