There is direct tax system in all the countries. This is termed as Income tax. All the earning individuals are required to pay income tax to the government. Income tax is calculated on the basis of salary and in which income tax category the individual falls into. Income tax is being paid through a part of the salary of the taxpayer. But when the taxpayer has made some investments or anything which can exempt him to pay a little less of income tax. Most people do this. One of the ways is HUF. HUF is a Hindu Undivided family, it is a separate unit like an individual assessed separately. HUF can own property and also a business plan.
All about HUF
It is members of a family who do business together. To become a member, one should be born in that family. All the lineal descendants of the family are members. Membership is by birth. Karta is the senior most member who manages the business. Registration of HUF is not compulsory. And it has a lot of business secrecy and a way to reduce the tax burden.
Income Tax benefits of forming a HUF
The basic logic behind HUF is to save income tax. As when a HUF is formed, it gets a different PAN card, which is required for income tax. Now the family members do not have to pay income tax individually and instead of whole as one. If in a family husband and wife are earning they have to pay tax individually, because both of their income will be shown by their individual PAN cards, but if they form a HUF for their business, they will have to pay as a unit. The members can split income and pay individually or as one HUF, to reduce the tax liability. Also, businesses can be split to reduce the tax burden. Giving gifts to coparceners in HUF also reduces tax burden. Further getting loans is easier for a HUF. Additional income did not show can avail tax benefit.
Apart from these advantages, there are also a few disadvantages in HUF
HUF basically means a joint business by family members. All the assets are in the name of family and they are not individual assets. Karta of a family has restrictions on making a gift; he cannot gift the HUF property. The entire share is divided equally amongst the members of the family. Partition of HUF is the very difficult case, as it involves a lot of clashes between family members for the partition of HUF property and assets. A HUF can also not become an equal partner in any other company. HUF can be broken if all the parties consent to it. Also, women cannot add a separate property to HUF.
How is HUF taxed?
HUF has its own PAN card and files for separate income tax return. Exemptions can be availed from section 80. HUF can take life insurance for its family members. With HUF formation, it can take the whole income, or provide salary to its members, and then deduct it from HUF’s income. Investments can be made in the name of HUF and it is taxed moreover in the same way as an individual taxpayer is.
Understanding HUF with an example
Mr. Rahul Sharma has formed a HUF with his wife and kids as members. Now Rahul has a job and earns Rs. 20 lakhs annually. He has inherited the property of his late father, being a single child; whole property is in his name. and he has that in HUF. The property has an earning of Rs. 7.5 lakhs.
Let’s look at the income tax benefit before and after HUF.
| Sources of Income | Rahul’s income before HUF- in Rs | Rahul’s income after formation of HUF- in Rs | Income of HUF- in Rs. |
| Salary | 20,00,000 | 20,00,000 | |
| House property rent | 7,50,000 | – | 7,50,000 |
| Deduction on house property rent | 2,25,000 | – | 2,25,000 |
| Income from rent | 5,25,000 | – | 5,25,000 |
| Taxable income (total) | 25,25,000 | 20,00,000 | 5,25,000 |
| Section 80C exemptions | 1,50,000 | 1,50,000 | 1,50,000 |
| Net tax | 23,75,000 | 18,50,000 | 3,75,000 |
| Tax to be paid in total | 5,53,625 | 3,91,400 | 7,725 |
Therefore, tax paid by Mr. Rahul and HUF is Rs. 399125 and tax saved is Rs. 1, 54,500
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Summary
HUF is a definite way to save income tax, as the tax liability is reduced immensely. Like before if individuals are taxed now with HUF, the tax that will be paid will be a single unit tax. There are also various other advantages of forming a HUF, becoming a member is by birth.
