Did you hear about a Hindu Undivided Family (HUF) entity that can help you save taxes?
Don’t worry if you haven’t heard about it. In this post, we will discuss HUF and how to use it to save more taxes.
Estimated read time: 3 minutes and 39 seconds
Buckle up, here we go!
What is the Hindu Undivided Family (HUF)?
HUF is a separate tax entity that a family of Hindus can create. It is considered a separate person under the Income Tax Act of 1961.
The HUF comprises the head of the family (Karta), his wife, their children, and their grandchildren. The male members of a HUF are called coparceners, whereas the females are referred to as members. Only a coparcener can demand the partition of HUF.
But in recent years, they also considered daughters to be coparceners of their father’s families on birth in the same manner as sons and have the same rights as sons in the family properties.
That means a Hindu family can come together and form a HUF. You can save taxes by creating a family unit and pooling the assets.
HUF typically has assets that come from ancestral property, a gift, a property gained from the sale of joint family property, a will, or property donated to the common pool by members of HUF.
It is a separate entity for the purpose of taxation and is governed by specific rules and regulations. Therefore, HUF has its own PAN card and needs to file tax returns separately.
This is not only limited to Hindus. Jain, Buddhist, and Sikh families can form a HUF too.
How does HUF works?
Let’s say you have a family of 4 members. You, your partner and two children. You and your partner work and fall under the 30% tax slab.
You have an ancestral property that generates rental income. If this income and property are under your or your partner’s name, you have to pay a 30% tax.
But what if you had a HUF formed and had transferred the property and its income to the HUF?
Since it is a separate entity, it has a unique pan card. The HUF can claim tax deductions and exemptions on rental income. Plus, you don’t have to pay a tax if the income is under ₹3 lakhs.
Also, you can invest in tax-saving schemes through the HUF and claim a deduction under Section 80C.
How to form a HUF?
The following steps need to be followed to form a HUF:
- Choose a Karta: The eldest male member of the family is usually chosen as the Karta of the HUF. The Karta manages the affairs of the HUF.
- Create a deed of declaration: A deed of declaration needs to be created, which should include the name of the HUF, the name of the Karta, and the names of the other members of the family who are a part of the HUF.
- Apply for a PAN card: A PAN card needs to be applied for the HUF, which will be used for all tax-related purposes.
- Open a bank account: A separate bank account needs to be opened in the name of the HUF, which will be used for all financial transactions of the HUF.
Advantages of HUF
- Separate legal entity: HUF is a separate legal entity for tax purposes. That means it has its own tax returns, bank account, and assets. This can help your family to manage finances more efficiently.
- Tax benefits: HUF may claim all the tax deductions and exemptions that an individual taxpayer can claim except the tax rebate under Section 87A. This reduces the tax liability of your family.
- Succession planning: We can use HUF as a tool for succession planning. You can transfer your family assets to the HUF, and Karta can manage them on behalf of your family. This ensures that the family assets are protected and taken care of efficiently.
- Partition: In case of a dispute within your family, the HUF can be partitioned. The HUF’s assets will be divided among your family member, as per their share in the HUF.
Disadvantages of HUF
- Equal rights of members: Though all members receiving equal rights is a good thing, sometimes it can work as a disadvantage too. We cannot sell common assets without the agreement of all the members. Any additions to the family, through birth or marriage, become a member of the HUF and get equal rights. A HUF can get too large to manage.
- Partition: The only way we can dissolve a HUF is by a partition. All members have to agree to dissolve the HUF. Under a partition, assets are distributed to members, which can lead to some disputes and legal hassle.
- Complex legal structure: The legal structure of HUF can be complex, and the rules governing it can be difficult to understand. This can make it difficult for your family to manage finances and comply with tax laws.
Forming a HUF can help your family to manage finances more efficiently, enjoy tax benefits, and provide a structure for succession planning. Remember, it is necessary to comply with complex legal rules and regulations.
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