HUF Tax Benefits: How to Save Income Tax?

The Hindu Undivided Family (HUF) concept, which is deeply rooted in Indian culture, is more than just upholding family values. It is also about smart tax planning and tax savings. In this article, we will look at the various tax benefits available with the HUFs to reduce their tax liability, increase their savings, and promote financial stability. From defining a HUF to identifying the eligible tax deductions and exemptions available, we aim to provide a clear and easy understanding to maximize HUF tax benefits.

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Table of Contents:

What is a HUF?

Tax Implications by Forming a HUF

HUF Tax Benefits

How are HUFs Taxed?

HUF Tax Benefits: An Example

Disadvantages of Forming a HUF

Most Asked Questions

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What is a HUF?

A HUF is a distinct legal entity as per the Income Tax Act. It is a unique feature of the Hindu Law that permits families to form a separate legal entity that shall include all the members throughout the generations. This concept is similar to the joint family system of India. A HUF is formed consisting of one common ancestor and all of his descendants, including wives and unmarried daughters. It is a legal entity that can own a property, conduct business, generate income, and incur expenses.

Tax Implications by Forming a HUF

Once a HUF is formed, it is treated as a separate entity for tax purposes. This separate legal entity recognition enables the HUF to be taxed separately from that of its member’s individual tax liabilities. The following are the tax implications of forming a HUF:

• Separate tax slab: Similar to an individual taxpayer, the HUF also has a separate tax slab. Also, the HUF is entitled for deductions and exemptions under the Income Tax Act.

• Unique PAN: HUF is required to obtain a separate Permanent Account Number (PAN), for financial and tax purposes.

HUF Tax Benefits

Forming a HUF has several tax benefits such as:

• Double advantage: Since the HUF and its members are taxed independently, this permits families to split the income, thereby resulting in lower tax liability.

• Deductions and exemptions: Similar to individual taxpayers, HUF can claim deductions and exemptions under various sections of the Income Tax Act like Section 80C, Section 24, and so on.

• Income distribution: Income from the HUF’s investments, properties, or a family business is taxed in the hands of HUF only, often resulting in the lower taxation of the income.

How are HUFs Taxed?

A HUF’s income is taxed similarly to an individual taxpayer, but at the applicable slab rates of the HUF. A HUF may earn an income from the following sources: rent from property, business profits, investments, or gifts received. The tax liability is calculated after considering the deductions and exemptions. Furthermore, any income distributed to the HUF members is exempt from tax.

HUF Tax Benefits: An Example

Consider an example: Mrs. Y, a self-employed professional earning INR 18 lakhs per year, decides to form a HUF with her husband and two children. She also receives INR 2 lakhs as dividend income and has a mutual fund investment that gives INR 1.5 lakhs per year. Mrs. Y inherits a family property with an annual rent of INR 6 lakhs, which she chooses to transfer to the HUF.

The above example shows that by transferring the rental property income to the HUF, Mrs. Y is able to reduce her tax liability. This was possible only by distributing the income within the family more effectively. This shows the advantages of using HUF for tax planning, particularly where there are multiple sources of income apart from the professional earnings.

Disadvantages of Forming a HUF

The tax benefits from forming a HUF are many, there are disadvantages also from forming a HUF:

• Division of Assets: Since the assets of the HUF are owned by all the members equally, there can happen a dispute regarding the control, and usage of the assets.

• Partition and Dissolution: Dissolving or partitioning a HUF can be a challenging task since it will require agreement from all the members of the HUF. Furthermore, the partition may also lead to the tax implications.

• Management Issues: The Karta, being the head of the HUF has control over HUF’s assets. Sometimes, disputes may happen between the family members regarding the use of assets and decision-making.

FAQ

Q1. Explain HUF in terms of taxation.

Under the Indian Income Tax Act, a HUF is recognized as a separate legal entity, which includes all the members of a Hindu family. A HUF can be simply formed by a married couple or a family, and it has a separate tax status, distinct from its members.

Q2. What are the tax benefits from creating a HUF?

The HUF is taxed independently which allows it to claim an additional exemption limit similar to an individual taxpayer. Thus, a family can split the income effectively, thereby reducing the overall tax liability by utilizing the basic exemption limit for the HUF.

Q3. What kind of income can a HUF earn?

A HUF can earn various types of income such as: income from property rent, business profits, investment income like interest or dividends, and gains from sale of investment property held by the HUF.

Q4. Are deductions under Section 80C allowed to HUFs?

Yes. HUF can claim deductions under Section 80C towards the investments or expenses, such as life insurance premiums for members, tuition fees for children’s education, and contributions to provident funds, and likewise. The limit of Section 80C for maximum deduction of INR 1,50,000 is also applicable.

Q5. Explain the tax implications of gifts received by HUF.

The gifts received by HUF from its members are not taxable. However, gifts received by a HUF from non-members in excess of INR 50,000 in a year is taxable, subject to certain conditions, where the gifts are exempt.

Q6. Can a HUF make investment in tax-savings instruments?

Yes. HUF can make an investment in tax-savings instruments such as Public Provident Fund (PPF), Equity-Linked Savings Scheme (ELSS), and fixed deposits, to reduce the tax liabilities.

Q7. Is it mandatory for HUF to file an Income Tax Return?

Where the total income of the HUF exceeds the basic exemption limit, it is mandatory for the HUF to file an Income Tax Return (ITR). Moreover, HUF can also file an ITR if it wants to carry forward a loss or claim a refund.

Q8. Can a HUF claim deduction for repayment of home loan?

Yes. A HUF can avail deductions for interest paid towards the home loan as well as for the principal repayment of home loan under Section 80C, provided the property is owned by the HUF.

Q9. Are there any special tax rates applicable for HUFs?

No. HUFs are taxed at the same rate as applicable to individual taxpayers. They can also choose between the new and the old tax regime.

Q10. Can a HUF carry forward the losses?

Yes. A HUF can carry forward the losses to set off against the future sources of income, except the loss under the head ‘Income from House Property’. However, the carry forward of losses are subject to the provisions of the Income Tax Act.