Understanding HUF Tax Benefits for Reducing Taxable Income

Income Tax

One of the best ways to reduce your tax liability is by forming a HUF(Hindu Undivided Family). Members of the same family, with a common ancestor, form HUF. HUF includes the daughters and wives as well. Jain, Buddhist and Sikh families can also opt for HUF tax benefits. Read on to know how HUFs are taxed, the tax benefits and a few limitations of HUF. But first, understand what HUF is and how it is formed.

What is HUF?

The Hindu Undivided Family (HUF) typically comprises individuals with a common lineage and family ancestors, including unmarried daughters and wives. Additionally, joint family property and copartnership should be present for the HUF to be operational. (Due to the Hindu Succession Act created in 1956, the definition was broadened to include those that were Hindus at birth and those that practised Sikhism, Jainism, and Buddhism).

Since HUF is considered an individual ‘person’, a separate tax return must be filed for it. HUF is not sanctioned through a legal contract; instead, it comes into effect when two eligible people marry, or a child is born within the lineage. Although rules and regulations about this have changed over the last couple of years, the family’s eldest member (generally male) is pronounced the head or the ‘Karta’ of the family. HUF is considered a separate enterprise and therefore is regulated through its own tax mechanisms.  

How to Create a HUF?

In most cases, a HUF is automatically created after marriage. However, it is recommended that most people have a written agreement that is legally binding and available to them at all times. A prerequisite to forming a HUF and collecting HUF benefits includes the creation of the HUF should be through a family/unit and not an individual. Once a HUF is formulated, a legal deed shall come into effect, including a pan number and a bank account in HUF’s name. 

Additionally, to understand what a Hindu Undivided Family tax is, individuals must understand a couple of things before forming a HUF. Assets can be a part of HUF, whether from relatives or non-relatives. Those that are from non-relatives should not cost more than Rs. 50,000. Those passed on through a family will, common ancestral property, and property acquired through the sale of a property owned by the joint family are all assets belonging to the HUF. Income from other sources (not individual incomes), capital gains, and common profits and business gains sourced through the HUF belong to it, as it is a separate assessable entity. 

Also Read: Taxation In Mutual Funds: Mutual Fund Tax Calculation

How is HUF Taxed?

At its core, a HUF is taxed like an individual, with all the same rates. The main reason why many financial advisors cite multiple benefits of HUF in income tax is that the income tax slab for HUF also has an exemption limit of Rs.2.5 lakh, similar to that of individual income tax rates. It also complies with most of the regulations under Section 80C, 80D, and 80G, which relate to individual income tax accounts. 

This means that whatever tax benefits an individual may get from their individual account, a family can avail the same advantages through their HUF tax benefits. Any income generated through investments made by the HUF is taxable solely through the HUF and not the different individuals. Individuals who contribute to developing a HUF can also obtain other HUF benefits such as a salary, which shall be expended on the HUF. 

How to Save Tax by Forming a HUF?

Many HUF tax benefits are available to families and individuals across the board. 

• Gifts within the limit of Rs.50,000 that are given through utilising a HUF account will be tax-free. As HUF is its own specific entity, it can run its business, invest in stocks and shares, and even own residential property without paying taxes. 
• Getting a home loan through HUF can be easier as individuals can save up to Rs.1.5 lakh tax on loans upon repayment and Rs.2 lakh on further interest.
• Another one of the benefits of HUF in income tax is through tax benefits provided alongside the purchase of life insurance and health insurance premiums. 
• Lastly, when it comes to capital gains, in many regards, HUF is also exempted from Section 54F and 54, which allow HUF members to save tax on their capital gains.

Benefits of the HUF System

• The family gets an extra PAN card in the name of the HUF. Income tax can be filed separately for the HUF income using this, and the personal income of each member is not included in this but is filed using their individual PANs. This helps in reducing tax liability. 
• Certain tax deductions and rebates are available for HUFs under section 80C of the Income Tax Act, 1961.
• Gifts of value up to Rs.50,000 received by the HUF are tax-free. 
• HUF can own residential property without having to pay property tax.
• An additional deduction of Rs.25,000 per member (Rs.50,000 for senior citizens) is available for premium paid on health insurance.

Drawbacks of the HUF System

• Assets of a HUF are for the whole family and not an individual. Thus all members have a right over them.
• On dissolution of the HUF, each member is liable to pay tax on their profit share. 
• Every new coparcener has equal rights in the HUF. As new ones are added, the share of each member keeps dissolving. Moreover, shutting down the HUF requires a go-ahead from all members.
• HUF is an Indian concept and is not recognised in other countries.

Also Read: What Are The Best Tax-Saving Instruments In India?

Final Word

Understanding how HUF works and what HUF tax benefits you can avail of can help you save taxes. Whether you are a part of a joint family or nuclear or just got married, you are eligible for tax benefits under the HUF provision. Talk to your family members and register yourself as a HUF, get a PAN and a bank account to start availing of the tax benefits for HUFs. 

FAQs on HUF Tax Benefits

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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.