Save Tax by forming HUF: Taxation, Benefits & Drawbacks.
HUF stands for Hindu Undivided
Family. A HUF can be created by a group of Hindu families. A HUF can be formed
by Buddhists, Jains, or Sikhs as well. All of the lineal descendants of one
common ancestor, including their wives and unmarried daughters, make up HUF. Depending on where the HUF's control is based,
the HUF may or may not be a resident of India. There are many joint families in
India, and these families typically earn joint income as opposed to individual
income. Since these are joint incomes rather than individual incomes, they
cannot be taxed in the hands of a single person and must instead be taxed on
behalf of the entire family.
By forming a family unit and
combining your assets into a HUF, you can reduce your tax burden. HUF is taxed
independently of its members consequently, it may individually claim any
exemptions or deductions permitted by the tax regulations (such as those under
Section 80). HUF files tax returns independently of its members and has its own
PAN in contrast to the individual members of the HUF who also have a separate
PAN Card because they are taxed in the hands of the family.
The main justification for
creating a HUF in order to save taxes is to gain access to a second PAN card in
a lawful manner. A new PAN card is issued to the HUF, and the Family would pay
tax using this PAN Card because the Family's Income is not taxed in the Hands
of Any Specific Individual.
As a new PAN card will be issued
to the entire family, it will also benefit from Income Tax Slab Rates, which
means that income will be tax-free up to the stipulated limits before being
taxed progressively at 10%, 20%, and 30% which results in tax savings.
Taxation of HUF
·
The HUF files a separate tax return and has its
own PAN. Due to the existence of an entity distinct from its members, a
separate joint Hindu family business is founded.
·
The HUF may claim exemptions and deductions
under Section 80 in its income tax return.
·
If members contribute to the HUF's operation, the
HUF may pay them a salary. The HUF revenue might be used to offset this salary
expense.
·
HUF can purchase a life insurance policy on
their member lives.
·
HUF's income can be used for investments. Any
profits from these investments will be taxed to the HUF.
·
The same rates of taxation apply to HUFs as to
individuals.
·
The HUF's Karta has the authority to sign any
document on its behalf. He may, however, also provide this authority to other
adult members.
·
The HUF's income tax return must be filed by
July 31 of the assessment year. However, if a tax audit is necessary, the
deadline for filing a return would be September 30.
Benefits of HUF
The primary benefit of opening a Hindu
Undivided Family Account is that the family receives an
additional PAN Card and can
divide their income, which will enable them to save money on
taxes and lower their overall
tax burden.
·
A HUF is eligible to own a home without paying
property taxes. Additionally, under Section 80C of the Income Tax Act, it is
possible to take out a house loan to purchase a home and receive tax benefits
of up to INR 1.5 lakh for loan repayment and up to INR 2 lakh for interest.
·
In accordance with Section 80C, a HUF may engage
in Equity Linked Savings Schemes (ELSS) and tax-saving Fixed Deposits to obtain
tax benefits of up to Rs 1.5 lakh.
·
A HUF cannot establish a Public Provident Fund
(PPF) in its own name but it is permitted to claim tax advantages for
contributions made to members' PPF accounts.
·
Tax-free gifts up to a value of INR 50,000 are
available. A father with a HUF account can give a son with a smaller HUF
account more expensive property or cash, but he must state that the present is
for the son's HUF and not for himself.
·
A HUF may generate revenue by operating its own
business. It is able to invest in mutual funds and stocks. Due to its status as
a separate entity, the HUF also enjoys a basic tax exemption of Rs 2.5 lakh
Drawbacks of HUF
·
Equal
ownership rights: The fact that a HUF's members have equal rights on the
property is the biggest drawback. Without the consent of all members, the
common property cannot be sold. Any family members who are added by birth or
marriage are given equal rights and become members of the HUF.
·
Nuclear
Family Norms: The income tax department recognised HUF as a distinct
taxable entity. HUF is becoming less relevant nowadays, due to loosing
relevance of joint families. There have been several instances where families
or couples have fought about shared expenses without pooling their resources,
the HUF is becoming less significant.
·
Partition:
Closing a HUF may be the worst fear of starting it. A partition is the sole way
to dissolve a HUF. To dissolve the HUF, all members must consent. Assets are
assigned to members under a partition, which can result in numerous conflicts
and be very troublesome legally.
