HUF Benefits

When a common ancestor and his lineally descended family members together form a group, it is known as a Hindu Undivided Family or a HUF. Hindus, Jains, Buddhists and Sikhs can create a family unit and club their assets together to form HUFs. In 1917, the Hindu Undivided Family was first recognised as a separate taxable entity. Many families have enjoyed HUF tax benefits over the years and used it to build their assets.

HUF tax benefits

Here are the various kinds of tax benefits a HUF can avail-

1. Income tax benefits : 

From a legal perspective, a HUF is an identity separate from its members. The individual members of the Hindu Undivided Family have their PAN cards, and the HUF also has a different PAN card. A HUF can have its own business from which it generates income.  A HUF can also participate in the share market and invest in mutual funds and shares. Since it is a separate entity, it can enjoy a basic tax exemption amounting to Rs 2.5 lakh. So, let us suppose that an individual creates a HUF along with his spouse and two children. The members will enjoy income tax benefits as individuals. Along with this, the HUF will also be able to avail income tax deductions additionally, independent of its members.

2. Owning a house :

According to the current income tax laws, if an individual owns more than one self-occupied property, he is allowed to claim only one of them as his self-occupied property. The others will be considered as ‘deemed to be let out’, and you are required to pay tax on national rent. But, a HUF can also own residential property without paying taxes for it. It is also eligible to purchase a house by taking a Home Loan. Section 80C of the Income Tax Act permits a tax deduction of Rs 1.5 lakh in a financial year for loan repayment, to which the HUF is also eligible. The interest on the home loan repayment also attracts a tax deduction of Rs 2 lakh.

3. Life Insurance :

Individuals are allowed to claim tax benefits for certain investments and payments they make during a financial year. In the list of HUF benefits, these are also included. A Hindu Undivided Family can pay the life insurance premium for its members, and then claim tax benefits for this. Section 80C permits a maximum deduction of Rs 1.5 lakh for life insurance premiums paid.

4. Investments :

Section 80C also permits HUFs to invest in other tax-saving devices like Equity Linked Savings Scheme and Fixed Deposits and get tax-deductions of up to Rs 1.5 lakh. A Public Provident Fund account cannot be opened in the name of a HUF. But, the amount the HUF deposits in the PPF accounts of its constituent members is eligible for tax deductions.

5. Health Insurance

Section 80D permits tax deductions of up to Rs 25,000 for premiums paid on health insurance for an individual, spouse and dependent children. But, with the rising cost of medical treatments, medical insurance is also becoming more expensive. So, the tax deduction might prove to be insufficient to cover decent medical insurance. A HUF can prove to be a considerable advantage in this scenario. A HUF can claim an additional Tax deduction of Rs 25,000 for the health insurance premiums paid for its members.  If the health insurance premium is for a senior citizen, then the tax deduction limit is set at Rs 50,000 for the HUF.

How Are HUFs Taxed?

HUFs are taxed as separate entities. They have their own PAN and must file a separate income tax return. The income generated by the HUF from various sources like business, investments, and property is taxed at the applicable slab rates. Additionally, HUFs are eligible for various deductions and exemptions under the Income Tax Act, similar to individual taxpayers. The HUF can also benefit from tax-saving investments and expenses, reducing the overall tax liability.

Example of Tax Benefits

Here’s a tabular explanation of the tax benefits for the given example:

This illustration demonstrates how forming an HUF allows for effective tax planning by utilising exemptions and deductions, resulting in reduced overall tax liability for the family.

Forming an HUF – Process

1. Creation: A HUF is automatically created at the time of marriage. The head of the family (Karta) can start the HUF by contributing assets or property to the common pool.
2. Obtaining PAN: The HUF must apply for a PAN card, which is necessary for filing income tax returns and other financial transactions.
3. Bank Account: Open a bank account in the name of the HUF for managing its financial transactions.
4. Deed: Draft a legal deed declaring the formation of the HUF, including details of the members and assets contributed.
5. Registrar: Register the HUF deed with the registrar to formalise its existence.

Disadvantages of HUF

1. Complexity: Managing the finances and tax affairs of a HUF can be complex and may require professional assistance.
2. Shared Control: All members have a claim on the HUF assets, which can lead to disputes and complications in decision-making.
3. Dissolution Difficulties: Dissolving a HUF and distributing assets among members can be challenging and time-consuming.
4. Legal Formalities: The formation and maintenance of a HUF involve several legal formalities and documentation.
5. Tax Implications: While HUFs offer tax benefits, improper management can lead to penalties and legal issues with tax authorities.

Conclusion

There are different tax benefits provided by the government, and  you should make use of them.  Many people choose to create a HUF for the tax benefits it offers in the long run. The benefits of HUF in income tax are visible, which is why it is so popularly used as a way to save income tax.

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