In India, there are many undivided families of Hindu ethnicity. However, most Indians are unaware of the tax benefits that they can obtain by pooling in their assets to form Hindu Undivided Family or HUF.
According to the Income Tax Act of 1961, HUFs are considered separate entities for the purpose of taxation. The income earned by family members falls under the category of joint income. Thus, each member does not have to pay taxes separately, as HUF has its own PAN for filing taxes. Furthermore, Buddhists, Jains, and Sikhs can also avail the income tax benefits for HUF.
SO, if you are looking for a way to save taxes, keep reading to learn more about the income tax rules and regulations regarding HUF.
The creation of a Hindu Undivided Family should take place keeping in mind the financial and legal requirements of the family. However, to avail HUF income tax benefit, you need to meet the following conditions:
From a legal point of view, a Hindu Undivided Family is a separate entity with its own PAN card. Upon the formation of HUF, certain incomes of members will fall under the joint income category. Taxation of this income takes place according to the individual income tax slabs at 10%, 15%, 20%, 25% and 30%. However, this income is tax-free up to a specified limit.
Furthermore, returns obtained through investments made using this joint income also face taxes at the same rate as an individual.
Section 80 of the Income Tax Act offers various tax deductions and rebates for a Hindu Undivided Family. These deductions apply to home loan repayment, insurance premium, investments in fixed deposits or Equity Linked Savings Scheme (ELSS), etc.
To understand the tax benefits of forming a Hindu Undivided Family, let’s take an example.
Rajeev has a wife and two children and decides to form a HUF. As he has no siblings, Rajeev obtains the ancestral property after the death of his father. As per the Income Tax Act, we will treat the annual rent of Rs. 6 lakh from this property as part of the HUF joint income.
Moreover, Rajeev earns an annual professional income of Rs. 20 lakh for which he pays taxes separately. Now, take a look at the following table to understand how Rajeev will save taxes by creating HUF.
|Income Sources||Rajeev’s Income Before Forming HUF||Rajeev’s Income After Forming HUF||HUF Joint Income|
|Annual salary||Rs. 20,00,000||Rs. 20,00,000|
|Rent from ancestral property||Rs. 6,00,000||Rs. 6,00,000|
|Standard deduction on house rent (30%)||Rs. 1,80,000||Rs. 1,80,000|
|Income from property||Rs. 4,20,000||–||Rs. 4,20,000|
|Total taxable income||Rs. 24,20,0000||Rs. 20,00,000||Rs. 4,20,000|
|Tax deduction under Section 80C||Rs. 1,50,000||Rs. 1,50,000||Rs. 1,50,000|
|Net taxable income||Rs. 22,70,000||Rs. 18,50,000||Rs. 2,70,000|
|Payable Tax||Rs. 5,13,240||Rs. 3,91,400||Nil|
Total tax payable by Rajeev before forming HUF is Rs. 5,13,240. Meanwhile, after he creates a Hindu Undivided Family, he has to pay a tax of Rs. 3,91,400. Thus, he ends up saving Rs. 1,21,840.
If you are considering creating a Hindu Undivided Family, you must see both sides of the picture. Indeed, a HUF can offer numerous financial benefits. However, there are some disadvantages to it as well.
Despite having an elder member, who looks after the financial and legal decisions, every member of HUF has equal rights on common property. Thus, if one wants to sell an ancestral property, it requires the agreement of all members.
Furthermore, Hindu Undivided Family can become too large as, by birth and marriage, new members get added to the family. This further complicates decision making.
Probably one of the primary disadvantages of a Hindu Undivided Family is its partition. To close down a HUF, every member needs to agree to a fair partition. The division of common assets can lead to various disputes and legal hassles.
Also Read: Tax Benefits On Loan Against Property
To reward law-abiding citizens who pay income tax diligently, the government of India introduces various ways to avail tax benefits. One such medium for those of Hindu ethnicity is creating a Hindu Undivided Family. The income tax benefits for HUF can save taxes up to Rs. 1.8 lakh. However, like every other scheme, forming a HUF also has its drawbacks. Thus, analyse your financial and familial needs before taking this decision.
1. Should a HUF always be a resident of India?
No, it is not mandatory for HUF to be an Indian resident always. In case the control and management of the affairs of family members are outside of India, the HUF will come under the category of non-resident Hindu Undivided Family.
2. What income can be shown in HUF?
According to Section 64(2) of the Income Tax Act, the joint income of HUF cannot include a member’s professional income. It also does not include the income they obtain through the sale of self-acquired assets. Thus, income from family business, mutual fund schemes, and investments fall under HUF joint income.
3. Can the members of the HUF and the HUF separately claim deduction under Section 80C?
For taxation, HUF get treated as a separate entity and can enjoy various tax benefits under Section 80C. However, it is not possible for individual members of HUF and the HUF to claim a deduction for the same investment or expenses.
4. Can the eldest member of the family be an NRI to form a HUF?
As per the Indian succession laws, HUF consist of coparceners and members. The eldest coparcener is called the Karta and is responsible for the family’s financial and legal affairs. Thus, the Karta can be an NRI and form HUF.
5. Can HUF earn a professional income every year?
No, the joint income of HUF cannot include any salary income. Thus, taxation of professional income and rental income takes place under the name of individual members. This is because individuals earn a professional income through their personal abilities and skills.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
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.
|Section 194IB||Section 44AA||Section 80E|
|Section 195||Section 80EEA||Section 80DD|
|Section 80CCC||Section 80GG||Section 80 G|
|Section 54F||Section 1941A||Section 10|
|Section 194Q||Section 192||Section 269SS|
|Section 80DDB||Section 44AD||Section 194C|
|Section 194A||Section 194H||Section 80D|
|Section 80C||Section 80C, 24(b), 80EE & 80EEA||Section 234A|
|Section 50C||Section 80C||Section 80EEA|
|Section 194B||Section 194J||Section 206C|
|Section 80CCG||Section 80 EEB||Section 24Q|
|Section 40b||Section 194C||Section 54EC|
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