How can you save Income Tax as an HUF (Hindu Undivided Family)?

There are multiple ways to optimize tax in our legal system. Utilizing such ways can help you save a lot of income tax on your part. One such way is to create a HUF. In this blog, I will explain to you about what is a HUF, how you can establish a HUF and the benefits & drawbacks of forming a HUF.

Let’s begin

What is an HUF (Hindu Undivided Family)

HUF is a form of business entity that can be formed by pooling in the assets of a Hindu family’s assets. A HUF is treated as a different entity by the Income Tax laws from its members and taxed accordingly. The eldest member of a HUF is known as the “Karta” or “Family Manager” in standard terms. In case of the death of Karta, the next eldest member becomes the Karta of the HUF.  A HUF has a unique PAN, and it is mandatory to file its separate ITR.

Apart from Hindu families, Jain, Buddhist, Hindu, Sikh families can also create a HUF.

How HUF is taxed?

HUF is treated as a different entity by the IT department. This allows a HUF to claim multiple deductions including Deductions u/s 80C, apart from its members. This means if you form a HUF, then not on;y you, your partner and your children, but the HUF too can claim Deductions u/s 80c. This is a significant benefit when you want to create assets but want to optimize the tax.

How can you set up an HUF?

Although no specific registration is required to set up a HUF, there are specific criteria that you must fulfil. Let’s take a look at these criteria.

1. You cannot set up a HUF single-handed. It can be set up by a Hindu, Sikh, Jain or Buddhist family only.
2. A HUF includes an individual, his/her spouse, their lineal descendants, their wives and unmarried daughters.
3. A HUF has to be registered formally through a legal deed. This deed must include details of every member of the HUF and all the HUF business operation.
4. A mandatory Pan Card and a Bank Account is required for a HUF.
5. The HUF assets include property acquired from the ancestors, by selling the common family property, property acquired through will or gifts.

Documents necessary to form an HUF

Following documents are required to form a HUF

1. PAN card of the Karta
2. Any other Identity proof of the Karta (Driving Licenses/Aadhaar Card/Voting Card)
3. Residential proof (Electricity Bill/Gas Bill/Telephone  Bill)

Benefits of forming an HUF

1. As per the law, a HUF is a separate legal entity. So, just like an individual member of the family, it has a PAN card. It can establish and run a business of its own. The income generated through this HUF is exempted up to 2.5 lakh. So if you and your family members form a HUF, you can claim additional tax benefits for the HUF apart from the tax benefits you get individually. HUF is created as a separate business entity. So it becomes mandatory to get a PAN and file separate ITR for a HUF.
2. As per the existing Income tax laws, you can have only two “Self-occupied Property”. If you have more than two properties in your name, the others will be considered “let outs”, and you will have to tax on notional rent. But, a HUF is allowed to own property in its name. So if you set up a HUF and gift the property to the HUF, you will not have to save the rent.
3. As HUF is treated as a separate legal entity, it can claim all the tax benefits an individual can claim. For e,g. If your HUF pays for the members’ insurance, the amount paid as the premiums can be claimed for tax deductions u/s 80c of the Income Tax Act.
4. If the family members are participating in the Business operations of a HUF, it can pay salaries to these members. The salaries paid to it members will be deducted from the total income of a HUF
5. You can also make investments in the name of HUF from the income generated by it. HUF can invest in ELSS and various tax-saving Fixed Deposits. These investments are tax-exempted up to 1.5 lakh u/s 80c. The HUF can also claim the tax-exemptions on the payments made towards the amount deposited in the members’ PPF accounts.

Disadvantages of a HUF

Although there are many benefits of a HUF, there are some limitations to it too. Let’s take a look at the disadvantages of forming a HUF.

1. Setting up a HUF is easy, but dissolving it is a nightmare. As per the law, dissolving HUF demands equal distribution of the assets to its members after every member’s consent. So in some cases, it might lead to some serious legal troubles.
2. Managing a HUF is a challenging task. As per the law, every member enjoys the equal right in a HUF. This means a decision on the selling of any HUF property can be made only after the consent from each member. Any new member joining the family through birth or marriage automatically becomes HUF member, making the management difficult.
3. The Partition process is lengthy. Once you make an application for the partition with the relevant officer, he/she will assess the members and the properties of the members. Moreover, unless the partition is approved, ITR of the HUF has to be filed regularly.
4. Income received by the HUF members after the partition is taxed as the individual income of each member. This will increase the tax liability of the members.

Conclusive thoughts

Although you should pay the qualified tax as a law-abiding citizen, there is nothing wrong in availing various tax-saving benefits offered by the Government. HUF is one of many such options that you can choose.

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Probal Consulting Group is a leading Taxation, Accounting, and Compliance firm that helps individuals, MSMEs, and other businesses manage their accounting, taxation regulatory compliance affordably.