This form of organisation i,e The Hindu Undivided Family (HUF) is something which is not very commonly found across the globe and portrays the traditional Indian cultural values of the joint system of family.
Now, if we consider HUF only from an Income tax lens, it is considered as a separate entity and has its own PAN. Today, our focus is on understanding the intricacies of the Hindu Undivided Family (HUF) and its tax benefits and how it can provide significant financial advantages for eligible families. This blog will delve into the concept of HUF, its formation, and the myriad of tax benefits it offers under the Indian Income Tax Act.
What is a Hindu Undivided Family (HUF)?
A Hindu Undivided Family (HUF) is a distinct legal entity created under Hindu law, comprising individuals who are direct descendants of a common ancestor. This includes their spouses and unmarried daughters. The term "Hindu" in this context also extends to Buddhists, Jains, and Sikhs.
Key Features of HUF as per Income Tax perspective:
Formation:
An HUF is formed automatically under the Hindu Succession Act at the time of marriage. However, under Income tax, you can form a HUF only when you are married and have a kid (son / daughter).
You should prepare a deed on stamp paper declaring the formation of the HUF. It should have all the details, including the name of karta, co-parceners, address and source of funds in the corpus.
Once the declaration deed is made, the karta should apply for a permanent account number (PAN) for the HUF.
Karta:
The senior-most male member of the family, known as the 'Karta,' manages the HUF.
Members:
All other family members are known as 'coparceners,' who have the right to demand partition of the HUF.
Assets: HUF can own assets including ancestral property, gifts received by family members, and property acquired from the joint family income.
Tax Benefits of an HUF
HUFs enjoy various tax benefits under the Income Tax Act, making them an attractive option for families looking to optimize their tax liabilities.
- Separate Tax Entity
- An HUF is considered a separate entity for tax purposes, distinct from its members. This means the HUF can file its own tax returns and claim deductions independently. This will also mean that, it will get benefit of the basic exemption limit from tax which is enjoyed by individuals
How can you plan to save taxes via use of HUF?
- Say, you invest in the equity market in your own name, now if you gift money into the HUF and invest that same money into equity markets via HUF, you will essentially get INR 250,000 worth of LTCG tax free (Additional 150,000 from what you get as an individual)
- Also, the dividend which you will receive will also be taxed in the hands of HUF and most probably at a lower rate of tax
- Wealth Management and Succession
HUFs provide a structured way to manage family wealth and ensure smooth succession. By holding assets in the name of the HUF, families can avoid disputes and ensure orderly distribution of wealth across generations.
- Responsibilities and Compliance
While HUFs offer significant benefits, they also come with responsibilities:
- Maintain Proper Records: Accurate records of HUF transactions and income are essential.
- File Annual Returns: HUFs must file their income tax returns annually, just like individuals.
- Compliance: Adherence to relevant laws concerning investments, property transactions, and income reporting is mandatory.
Conclusion
The Hindu Undivided Family (HUF) structure provides substantial tax benefits and effective wealth management solutions. By understanding the provisions related to HUFs under the Income Tax Act, families can enhance their financial planning and achieve considerable tax savings. However, it is crucial to comply with legal requirements and consult with a tax advisor to maximize the benefits and ensure proper management of the HUF. While a member of the HUF is transacting with the HUF, he needs to take care of the clubbing provisions which could be attracted.
Incorporating an HUF into your financial strategy can be a prudent step towards optimized tax savings and structured wealth management, offering long-term benefits for the entire family.
FAQs
Q: What is the income tax rate for HUF?
The current income tax rates for HUFs, whether resident or non-resident, are as follows:
Q: What is the tax exemption limit for HUF?
The tax exemption limit for HUFs is up to Rs 2.5 lakh (in the old tax regime) and up to Rs 3 lakh (in the new tax regime).
Post Script - The rebate available for individuals is not available for HUF, meaning that when you say that an individual filing his return under the new tax regime will have no tax implication if his income is upto INR 7 lakhs, in case of HUF that amount will only be INR 3 lakhs.
