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Save Tax by forming HUF: Taxation, Benefits & Drawbacks.

Admin (ConsoLegal)

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.

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