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HUF and its Tax Benefits

What is HUF?

HUF means Hindu Undivided Family. A Hindu family can come together and form a HUF. Buddhists, Jains and Sikhs can also form a HUF.

The Hindu Undivided Family is treated as a ‘person’ under section 2(31) of the Income-tax Act, 1961, for the purpose of assessment under the Act. HUF has its own PAN and files tax returns independent of its members. HUF is taxed separately from its members. It has a separate tax presence.

HUF is governed under Hindu law board and could be formed by a married couple or by members of a joint family.

Who are the members of HUF?

HUF could be formed by two members and at least one among them should be a male member of the family. The Senior most male member of the family would become ‘Karta’. The other person in the HUF are coparceners/Members.

How to create HUF?

HUF could be created keeping in mind the legal and financial requirements. A HUF is created through executing a deed, getting HUF PAN and opening a bank A/c in the name of HUF.

How to introduce capital in HUF?

  • Ancestral property: The Ancestral property can be transferred to the HUF to create capital of the HUF.
  • Gifts received from non- relatives: Gifts received from non-relatives up to the limit of Rs. 50,000 is exempted from levy of any tax.
  • Gifts received at the time of marriage: Gifts received at the time of marriage of any member of the HUF are fully exempted from the levy of Income Tax. However, gifts received at the time of marriage of daughter are not exempted and are taxable.
  • Gifts received from members of the HUF: If a gift is received from members of the HUF, then the income generated from these funds would get clubbed and taxed in the hands of the member making the gift. However, if this income is invested in tax-free instruments, the members making the gift will not have to bear an extra tax burden as the income is already tax free.

What are the terms and conditions to create HUF?

  • Every member of the family can deposit their income in the common corpus.
  • Any addition to the family by birth or marriage will add a member to HUF.
  • A Single person’s authority (Karta) while participation by the entire family.
  • Tax benefits on deposits under various sections.
  • Corpus can be divided only on agreement of every coparcener of the family.
  • HUF can have an insurance policy on the life of its members.
  • HUF can pay a salary to its members if they contribute to its functioning of the HUF. This salary expense can be deducted from the income of HUF.
  • Investments can be made from HUF’s income. Any returns from these investments are taxable in the hands of the HUF.
  • HUF will need to file return of income every year, considering every income which is received on its name.
  • Shutting down the HUF is a difficult process and hence, it is impossible to proceed with unless all the HUF members agree to the partition.

What are the advantages to creating HUF?

  • A HUF is taxed at the same rate as an individual.
  • According to IT act, tax rebates and deductions can be availed under sections 80C, 80D, 80G and so on for HUF account.
  • It also enjoys exemptions under Section 54 and 54F with respect to capital gains.
  • Gifts collected up to a worth of Rs 50,000 will be tax free. A father who owns a HUF account can gift a property or money of higher worth to a son who owns a smaller HUF account; but he should specify that the gift is for the son’s HUF and not to him as an individual. Under section 64(2) and 56(2) tax benefits can be enjoyed in such an instance.
  • Corpus can be used for investment in tax-free money instruments.
  • A HUF can open a Demat account and can increase the probability of receiving IPO.
  • How we can get tax benefits from HUF?

Since the account is equivalent to an individual’s account, there are various HUF tax benefits:

  • Income tax benefits: The income tax slab for HUF is same as that of an individual, with an exemption limit of Rs 2.5 lakh which implies that an individual can take an extra benefit of Rs. 2.5 Lakh.
  • Rental Income from a property: Rental income from a property could be received on behalf of a HUF instead of an individual account. HUF can avail an extra benefit of Standard deduction.
  • Business Income: Profits generated out of the family business, in the name of a HUF, shall be taxed accordingly and exemptions will give more leverage on tax saving.
  • Remuneration to Karta and members: Remuneration to Karta and other family members is an allowable deduction from the income of an HUF.
  • Life Insurance: HUF can pay Life Insurance premium for individual members and claim tax benefits under Section 80C. The maximum amount that can be claimed as a deduction under this section is Rs 1.5 lakh.
  • Investments: An HUF is allowed to make investments in the tax-saving Fixed Deposits and Equity Linked Savings Scheme (ELSS) to earn tax benefits of up to Rs 1.5 lakh under Section 80C.
  • Health Insurance: HUF can claim additional tax benefit of up to Rs 25,000 on Health Insurance premiums paid during the year for family members of the HUF. If the person is a senior citizen, the limit goes up to Rs 50,000.

HUF is not a separate legal entity, but it is a separate tax entity in viewpoint of income tax. By creating an HUF, we can maximize our tax benefits in the long run.

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