HUF or Hindu Undivided Family is a unique taxable entity which is existing only in India. This entity is taxed independently from its members. This entity can be created by Hindus as well as by Sikhs, Jains and Buddhists also. Let’s see how it can be advantageous from a taxation perspective.
How to create HUF
- The moment you are married, HUF is automatically created, however, it should consist of at least one male.
- It includes wives and unmarried as well as married daughters.
- It has assets which are either acquired as a gift or through WILL or as an ancestral property or property contributed to the common pool by members of HUF.
- HUF should be registered in its name and should have a legal deed. It is better if the HUF has its PAN number as well as a bank account.
Section 80 deduction
Salaried people are always fascinated about this section because it is where they can save tax. You may be surprised to hear that HUF can as well claim this deduction. However, it is better to invest in Life Insurance policies (on HUF member’s life) or bank fixed deposits. This leads to additional deduction of Rs.1,50,000. This is particularly beneficial for those individuals who have already exhausted their section 80C deduction.
Similar treatment for other deductions under section 80 like section 80D (mediclaim), 80G (donations to charity institutions etc.) and even section 80DDB (for deduction for payment for medical treatment of specific diseases or ailments etc.)
Section 24 benefit
Planning to buy a second home? Why not take it on the name of your HUF? There are two benefits for that – one is that you can make your HUF liable for the rental income taxability and another that the HUF can as well claim section 24 deduction for interest on housing loan for Rs.2,00,000 (Self Occupied Property) and for any amount (for let out or deemed let out property). And, HUF will also be able to claim standard deduction on the rental income received.
And, of course this interest deduction for housing loan is in addition to the interest on housing loan claimed by the family member or Karta.
Where the HUF owns the house and you and your family reside in that house, then you can also avail of the HRA exemption by taking rent receipts. This would result in two-way benefits as below.
- First, it will exempt your HRA to the extent as prescribed under the Act
- As the house is in the name of the HUF, it can claim deduction under section 24 for interest on housing loan as well as standard deduction also, since it is receiving rental income from you.
Low Tax Incidence Incomes
Incomes such as short term capital gains are taxed at a lower tax rate of 15%, which means that if the HUF earns taxable gains below the threshold, then only marginal income will be taxed at this rate. Also, it would be better to trade in the name of HUF, especially if you have large trading volume, since there would be tax on dividends if it crosses Rs.10 lakhs.
Gifts can be obtained by the HUF, where the tax liability arises when such gifts exceed Rs.50,000, unless such gift is received from the relatives. By this way, any karta or coparceners can manage their tax liability with respect to gifts by routing these gifts in the name of HUF.
Note: Karta is a person who is the head of a HUF. He is the one who is the senior-most male member of the family. Co-parceners on the other hand are the other members.
Points To Be Remembered
- HUF will need to file a return of income every year, considering every income which is received on its name. However, there is a clubbing provision that would hold the Karta liable for all the income which is diverted to HUF with an intention to evade tax.
- Any asset which is contributed to the HUF will be treated as a common asset and the asset owner must renounce the ownership in the name of HUF. Hence, if the previous owner wishes to sell such an asset, then it cannot be done so without the consensus of all HUF members.
- Any addition to the family by birth or marriage will add a member to HUF. Hence, it may be very difficult to manage such a large HUF, while keeping appropriate records of assets and funds contributed to HUF and by HUF.
- Shutting down the HUF is a difficult process and hence it is impossible to proceed with unless all the HUF coparceners agree to the partition.
- Where there is no male member, female member can become karta, but its tax aspects are still in debate.
- If any member of Karta transfers any property to HUF without any sufficient consideration, then it will be clubbed in the hands of such transferor.
- Where any woman has any wealth which she brought in from her maiden home, the income from the same would not be taxable as income of HUF, rather in hands of such wealth owners.