Tax Benefits of Hindu Undivided Family (HUF)
HUF means “Hindu Undivided Family”. An HUF is a separate legal entity as per Income Tax Act. HUF can also be formed by Jains, Sikhs and Buddhists along with Hindus. There are various incomes which are arising for the whole family and not in the name of a specific individual of the family. An HUF can have all the sources of income like Income for house property, income from business, income from other sources, but an HUF cannot have Income from Salaries.
For example, suppose husband earns 25 lakhs per annum and his wife earns 18 lakhs per annum and they also earn 8 lakhs from the rental of their joint property. There is a very common misconception about the rental property among the Taxpayers and they either club the income in either Husband’s or Wife’s income or they split the rental income in the incomes of both husband and wife. By doing so, they will be paying 30% tax for the rental income as they falls in the highest income tax slab. But if they form an HUF, then they can show this rental income as the income of the HUF and can save Rs 2,00,000 as HUF is a separate legal entity.
How to Form an HUF?
An HUF doesn’t forms automatically after the marriage of an Individual. For forming HUF no formal action is required only a creation deed is to be made in a stamp paper. After doing so, a separate PAN card should be obtained for the HUF and a separate bank account should be opened in the name of the HUF.
An HUF consists of
- Karta– Karta is the head of the family who has the right to do all the things for the family and to take decisions on behalf of the family.
- Co-Parceners– Co-parcener is the person who has the right to demand for his share in the property of the HUF if he wants to divide with the HUF. All the members of the HUF are not its co-parceners. It extends to four degrees in the hierarchy of the family
- 1st degree- holder of ancestral property for the first time.
- 2nd degree- Sons and Daughters.
- 3rd degree- Grandsons.
- 4th degree- Great grandsons.
Forming CORPUS for HUF
An HUF can form its corpus funds from following sources-
- Ancestral property acquired by will.
- Assets gifted by relatives/Friends.( But gifts till Rs 50,000 is tax free as per section 56 and the gifts received from relatives are also taxable as it is exempt only for Individual)
- Property received from other HUF by will.
Personal assets should not be used for forming the corpus of HUF because by doing so the income of HUF will be clubbed in the income of the person itself under section 64.
Benefits of HUF
- HUF gets benefits of Income tax slab.
- HUF is a separate legal entity as per Wealth Tax Act, 1957.
- HUF is eligible for deduction under section 80C, 80D, 80G and 80L.
- HUF has exemption under section 54 and 54F in respect of Capital Gain.
Tax Planning Tools for HUF
- Create more assessable units by partition of bigger HUF to various smaller HUF’s
- Pay remuneration to the Karta and the members so that the same can be allowed as deductions from the income of HUF.
- Provide gifts, loans to the members of the HUF as this doesn’t have any tax liability.
- Family settlements/ arrangements as these doesn’t attract and capital gain tax.
So there is lot of benefits of HUF but a piece of advice is that as the returns and transactions of HUF face a rigor scrutiny from the Income Tax Department so better be aware of all the sections or consultant a professional.