HUF means a Hindu Undivided Family. You can save a lot of taxes by creating a family unit and pooling of assets to form a HUF. HUF is taxed separately from the members. A Hindu family can come together and form a HUF. Buddhists, Jains, as well as Sikhs, can as well form a HUF. HUF has its own PAN and files tax returns which are independent of its members.
Who are all included in the HUF?
The HUF includes only those persons who, by birth, acquire an interest in some joint family property. It may also include all lineal descendants of these persons, and their wives, and children, both sons as well as daughters.
How to form a HUF?
While there are tax advantages to forming a HUF, you must also meet few conditions –
- One person is not allowed to form HUF. A HUF is formed by a family only.
- A HUF is automatically created at the time of the marriage.
- HUF may include a common ancest or and all of his lineal descendants, which also includes their wives and unmarried daughters.
- Hindus, Buddhists, Jains, and Sikhs can also form HUFs.
- HUF generally has assets which come as a gift, a will, or ancestral property, or property acquired from a sale of joint family property or property contributed to the general pool by members of HUF.
- Once an HUF is created it must be formally registered in its name. A HUF must have a legal deed. The deed will contain in itself details of HUF members and the business in which the HUF deals in. A PAN number along with a bank account must be opened in the name of the HUF.
What Income Tax Benefits can be gained by forming a HUF?
To recognize the income tax benefits additionally available by forming a HUF, let us take an illustration of a family, which is now ordinary, the nuclear family.
Manoj is married to Priya and has two minor children, Janvi (daughter) and Raj (son). Manoj’s annual income is Rs. 10, 00,000 and priya Rs. 10, 00,000. Manoj has inherited an ancestral property, an apartment, which is on rent i.e. annually Rs. 3, 00,000.
If Manoj forms a HUF, with him the Karta i.e. head of the HUF, his children will be known as the coparceners and his wife will be the member. The first benefit which Manoj shall have that the rent income of Rs. 3,00,000 which was hitherto assessed as part of his income and now be carved out and publicized as HUF income and the HUF shall be assessed separately as another entity and will have the benefit of the exemptions of IT Act related to those received by Manoj.
This will lead to considerable reduction of Income-tax being hitherto paid by Manoj and the HUF will pay a much lesser amount of Income tax on this income of Rs. 3, 00,000/- after enjoying all the exemptions available. Also, the gifts received by the coparceners or member, beyond the exemption limit can be shown as that received by the HUF, thereby reducing the income tax weight of both Manoj and Priya.
How is HUF taxed?
- HUF has its own personal PAN and files a separate tax return than the individual. A separate joint Hindu family business is created because it has an entity separate from its members.
- Deductions under Section 80 of the act and other exemptions can be claimed by the HUF in its income tax return.
- HUF could take an insurance policy on the life of its members.
- HUF can also pay a salary to its members if they are contributing to its functioning and working for the joint Hindu family business. This salary expense can be treated as an expense and deducted from the income of HUF.
- Investments could be made from HUF’s income. Any returns from these investments made by the HUF are taxable in the hands of the HUF.
- A HUF is taxed at a similar rate as an individual.
- Let’s understand the taxation of HUF with an illustration – After the death of his father, Mr. Rakesh Chopra decides to start a HUF along with his wife, son, and daughter as members of the HUF. Since Mr. Chopra had no brothers or sisters, property held by his father was transferred to him in the name of the HUF. The property owned by late Mr. Chopra receives an annual rent of Rs 7.5 lakhs. Mr. Rakesh Chopra has proceeds from a salary of Rs 20 lakh. By creating a HUF, Mr. Chopra could save tax, see below.
|Income from different sources||Proceeds of Mr. Chopra before formation of HUF||Proceeds of Mr. Chopra after formation of HUF||Income of HUF|
|House property rent||7,50,000||–||7,50,000|
|Standard deduction on house property||2,25,000||–||2,25,000|
|Income from house property||5,25,000||–||5,25,000|
|Total taxable income||25,25,000||20,00,000||5,25,000|
|Net taxable income||23,75,000||18,50,000||3,75,000|
|Sum of tax paid by Mr. Chopra & HUF||3,99,125|
|Total Tax saving due to forming an HUF||1,54,500|
Due to this tax arrangement, Mr. Chopra has saved tax of Rs 1,54,500. Both the HUF and Mr. Chopra along with the other members of the HUF are eligible to claim deduction under section 80C. Further income of the HUF can be further invested by the HUF and will keep on being taxable in the hands of the HUF.
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