How HUF Helps in Tax Saving

The HUF full form is Hindu Undivided Family. For tax purposes, HUFs are significant as they are treated as separate entities in the eyes of law. 

The key feature of a HUF is that tax on joint income is not applied to individual members of the family; rather, it is applied to the entire family as a whole, potentially allowing tax saving.

In this article, we will understand HUF meaning, how HUF helps in tax saving and more.

What is HUF meaning?

HUF means Hindu Undivided Family, which consists of all persons directly descended from a common ancestor, and also the wives and daughters of the male descendants. Although HUF is governed by the Hindu law, families who are Jains, Sikhs and Buddhists can also form it.

From a legal perspective, a HUF is considered a separate legal entity. Section 2(31) of the Income Tax Act 1961 considers a Hindu undivided family as an entity that is distinct and different from an individual. Since the HUF is considered as a separate entity, it is therefore taxed separately.

Individual members of the family have their own PAN cards, while the HUF has its separate PAN card. HUF can also create its own Hindu Undivided Family bank account. A HUF can run its own Hindu Undivided Family firm or business to generate income. It can also invest in company’s shares and mutual funds.

How is HUF created?

For creating HUF, it is important to keep in mind all the legal as well as financial requirements. A HUF is established by putting a deed into action, by obtaining a HUF PAN, and by creating a HUF bank account which is in the HUF's name.

The next step is to inject capital into the HUF corpus, which is exempt from taxes, using funds received as gifts from family members or assets acquired through an inheritance or will. It is important to be cautious when transferring personal assets and finances to the HUF account since any income earned there would eventually be combined with personal income under Section 64 (2) of IT Act. 

In terms of finances, the senior male member of a HUF is known as the Karta, or manager of the family. A corpus is formed in a HUF account so that all family members can combine their income. The corpus gets managed by Karta. Karta's signature is mandatory for each bank transaction. These accounts work similarly to individual savings bank accounts; there will be several tax benefits available for an individual’s account while the income of members is being pooled in the Hindu Undivided Family bank account.

If you’re wondering can wife become karta of HUF, then the answer is yes. In 2016, the Delhi High Court had ruled that neither the legislature nor the traditional Hindu Law, in any manner, limits the right of a woman to be a Karta of Hindu Undivided Family.

How can tax be saved by forming HUF?

Under Section 80C deduction for HUF, deductions can be claimed by HUF in its ITR since it is taxed independently from its members. For example, if you, your spouse, and your two children take the decision to form a HUF, a tax deduction under Section 80C can be claimed by all four of you. 

The HUF has its own PAN card and has to file an ITR which is independent. A distinct joint family business is established as the HUF is an independent entity from its members. The HUF may file an Income Tax Return (ITR) and claim exemptions and deductions under Section 80C. 

Members of HUF are able to acquire life insurance. They may receive remuneration if they assist the HUF function. This wage expense may be covered by the HUF revenue.

HUF income is available for investing purposes. These investments will result in profits that are subject to HUF taxation. HUFs are subject to the same tax rates that are applicable on individuals. 

Which tax deductions can be claimed by HUF?

A HUF can claim tax deduction or tax exemption in case of the following:

• Tax exemption on Income Tax: HUFs get to enjoy tax exemptions up to Rs. 2.5 lakhs on their income under the old regime and Rs. 3 lakhs in the new regime. The income tax slabs which are applicable on individuals are also applicable on HUFs. However, HUFs have their income threshold and tax calculation. 
• Purchasing a house: Under section 24(b) of the IT Act, HUFs can claim deduction on home loan interest up to Rs. 2 lakhs. Additionally, under section 80C, they can also avail of HUF tax benefits of up to ₹1.5 lakhs on principal repayment.
• Health insurance policy: Under Section 80D, the premiums paid towards health insurance policies for HUF members are deductible up to Rs. 25,000 limit and the whole amount paid on account of medical expenditure incurred on any HUF member’s health is deductible up to Rs. 50,000 limit per year. 
• This section also allows to claim a deduction upto Rs. 5,000 on expenses for preventive health checkups but the deduction shouldn’t exceed the overall limit of Rs. 25,000 and 50,000.
• Life insurance policy: Section 80C allows the HUF for a deduction up to ₹1.5 lakhs from premiums paid for life insurance policies on the lives of its members, just like it does for individual taxpayers. Under Section 10(10D), the sum assured received under a life insurance policy is tax-free, subject to certain limitations. 
• Tax Saving Deposits: When HUFs decide to invest their money in tax savings deposits and mutual funds such as ELSS, they can claim deductions of up to Rs. 1.5 lakhs under Section 80C. Under Section 112, capital gains earned from selling equity oriented mutual fund units held for more than 12 months qualify for reduced tax rate benefit.
• Other tax deductions: The advantage of deductions on education loan, donations made to charitable organizations and trusts and contributions made under specified pension schemes can be availed by HUFs to save tax.

What are the challenges faced by HUF?

As you can tell, the HUF structure is definitely tax efficient. Nonetheless, there are certain challenges faced by those who form HUFs. The first challenge is that, the moment the HUF is created all its members have equal rights in HUF property. The numbers keep on increasing in continuity as the admittance to HUF is by birth. 

The second challenge is faced in the case of HUF partition. In such a case, the partitioned sum paid out by the HUF is treated as income in the hands of individuals during that financial year.

Another challenge is faced when family members want to close HUF as there are legal and logistical concerns at the time of asset distribution amongst family members.

Conclusion

There are various HUF tax benefits which can be availed under different sections of the Income Tax Act while filing an ITR as a HUF. By availing the HUF tax benefits by forming HUF, you can reduce your tax burden and save tax. However, before forming a HUF, you must consider all the pros and cons. If you want assistance in filing tax return as a HUF, get in touch with Registrationwala.

Author: Dushyant Sharma

Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, telecom, and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.