A Hindu Undivided Family and its Tax Benefits
What is a HUF?
Members of a Hindu family can unite and form a Hindu Undivided Family (HUF). There is no requirement of a contract for forming a HUF. One person alone cannot avail the benefits of HUF. According to the Hindu laws, Jains, Buddhists, Sikhs come under the domain of the word ‘Hindu.’ However, communities such as Lingayats, Brahmo Samajist, Arya Samajist etc. can form a HUF even if they are not governed by the Hindu laws.
HUF consists of a common ancestor and every male child of him/her along with their spouses and daughters. Daughters are deemed to be a part of their father’s HUF till the time they get married.
How to form a HUF?
The process to start a HUF is simple. One has to receive a gift directly in the name of Hindu Undivided Family from his/her father, mother, in-laws, friends or relatives. It may be noted that under Section 56 of the Income Tax Act, 1961 a gift received by a HUF, is not subject to any income tax. As mentioned earlier, HUF is automatically formed when a person gets married and starts a family.
Documents required to start a HUF-
a) HUF Deed – A legal deed is mandatory. It a formal legal document which is stamped. It must contain the details of the Karta, coparceners and the business. Further, this deed provides a declaration that the Karta has full authority of the HUF accounts.
b) PAN – A PAN card can be made for a HUF.
c) Bank account – This bank account helps in maintaining all investments and expenses in the name of HUF.
Tax Benefits of HUF-
a) Firstly, the members can split the family’s income and file taxes separately. Individually as well as HUF tax return. This reduces the actual tax liability. Personal incomes of members are not required to be taken as the HUF earnings.
b) Secondly, different taxable units can be formed of HUF using the loopholes associated with will or gift. For tax purpose, the assets or savings made or even insurance premium disbursed by the HUF is deducted from the net income.
c) Thirdly, the family can settle on an arrangement regarding partition while saving on taxes. e. g. if a HUF has 2 coparceners who are not earning and a Karta and they have two business units and a house. The actual partition can be done by giving each business unit to each of the coparceners. This will also bring down the liability of tax and will not be impartial.
d) Fourthly, a woman is actually part of her husband’s HUF as well as her father’s. Even though a woman cannot start a separate account since the husband is the Karta, she can be the co-partner in the HUF. The additional revenue earned by the woman cannot be added to this.
e) Fifthly, the official reputation of a HUF remains the same even in the hands of women if the Karta or the last male member in the family dies. Hence the ancestral or acquired assets from the HUF stays in control of the widows and it doesn’t have to be partitioned.
f) Sixth, there is no requirement for ancestors joint family assets for the existence of the HUF.
g) Seventh, Women of the family can gift property and can make a gift towards the HUF, in her name.
h) Lastly, Acquiring loans is very easy for a Hindu Undivided Family.
Every individual in society wants to avoid taxes. Saving oneself from taxes is definitely possible due to the various provisions contained in the Income Tax Act, 1961. Many taxpayers often resort to illegal methods of saving themselves from tax, leaving their family in jeopardy. However, deductions and exemptions in cases of tax are possible in India. One of the scenarios where it is possible is in the case of a Hindu Undivided Family (HUF).
It is a well-established fact that every individual member of the family, especially the adult members of the family can enjoy tax benefits up to INR 1,00,000 in terms of Section 80C of the Income Tax Act, 1961. Apart from saving tax under this section, the creation of a HUF will enable the person to save more taxes since HUF in itself is a separate legal entity.