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As taxpayers of India, Income Tax is one of our major responsibilities. However, most of us are constantly on the lookout for legal options to save taxes and optimise our earnings.
The Income Tax Act allows various exemptions and deductions to taxpayers under multiple sections. It also has different kinds of payers who are eligible for varied facilities under the act. One such income taxpayer category with numerous tax benefits is HUF.
In today’s article, we will discuss what HUF means and the tax benefits of HUFs.
What does HUF mean?
HUF stands for Hindu Undivided Family. It is a facility under the Income Tax Act that allows members of a joint family to come together to claim tax benefits. HUF is considered a separate entity from individual taxpayers. It allows the pooling of income and assets to reduce the amount of tax liability on individual payers.
HUF, similar to individuals, has a separate identity in the form of an exclusive PAN (Permanent Account Number). It can consist of all the members of the family, including spouses and children, daughters-in-law, etc. Registering as HUF helps claim additional deductions apart from the regular benefits that individual payers are eligible for.
Example of HUF tax calculation
Mr A earns an annual salary of ₹20,00,000. He inherits an ancestral property that earns a rent of 8,50,000 per year.
Consider that Mr A pays all taxes as an individual. His taxable income will be:
| Salary income | ₹20,00,000 |
| House rent income | ₹8,50,000 |
| Standard deduction on house property at 30% | ₹(2,55,000) |
| Taxable income from house property | ₹5,95,000 |
| Total taxable income (Salary + House) | ₹25,95,000 |
| 80C deduction | ₹(1,50,000) |
| Net taxable income | ₹24,45,000 |
Now, consider Mr A is an individual taxpayer but also has a HUF registration:
| Particulars | Mr A’s tax | HUF’s tax |
| Salary income | ₹20,00,000 | – |
| House rent income | – | ₹8,50,000 |
| Standard deduction on house property at 30% | – | ₹(2,55,000) |
| Total taxable income | ₹20,00,000 | ₹5,95,000 |
| 80C deduction | ₹(1,50,000) | ₹(1,50,000) |
| Net taxable income | ₹18,50,000 | ₹4,45,000 |
The total taxable income of Mr A will be ₹22,95,000, which is ₹1,50,000 less than calculating income tax as an individual alone. Since HUF is regarded as a separate person, income tax allows claiming an 80C deduction as an HUF as well, besides claiming it as an individual taxpayer.
HUF tax benefits
- All income tax benefits eligible for individuals
As per the Income Tax Act, individual taxpayers and the HUF are separate legal entities and have separate identifications. To facilitate this, the act allows individuals and HUFs to maintain separate PANs.
Members of the HUF are allowed to start a distinct business under the HUF’s name, apart from their individual business or salaried employment. Besides 80C benefits for HUFs, the income is also eligible for regular tax brackets and all other exemptions.
- House property
Under the Income Tax Act, an individual can only declare one house as self-occupied property, irrespective of the number of houses he/she owns. A notional rent must be calculated on the other properties since they are categorised under ‘deemed to be let out’. The notional rent is also taxable.
Registering as a HUF allows individuals to report other properties as self-occupied under HUF’s name, thereby saving tax on notional rent. Interest on house loans and other property-related deductions can be claimed for properties declared under HUF.
- Insurance benefits
All members of the HUF are eligible for life insurance and health insurance schemes. Hindu undivided family can pay life and health premiums on behalf of the members, which are eligible for deductions. Life insurance premiums can claim 80C deductions, while health insurance premiums can claim 80D deductions.
- Tax benefits on investments
HUF, like individuals, can participate in stock market investments, mutual funds, fixed deposits and more. All the earnings and investments made under the name of HUFs are eligible for deductions and exemptions under the Income Tax Act.
Limitations
- HUF assets are not easily transferable since it requires every member of the HUF to agree. Disagreements and disputes between family members can cause complexities in HUFs.
- Forming a HUF account for the benefits of taxes alone can raise questions among income tax authorities. This can invite stricter supervision and serious actions against the members.
- The concept of HUF is specific to India. It is not a recognised format in other countries. Hence, members of the HUF moving out of India can create challenges in calculating income and taxes.
Bottomline
Forming a HUF offers a variety of benefits to taxpayers. Nevertheless, it also comes with its own set of drawbacks. Hence, taxpayers need to evaluate all relevant factors while forming a HUF. However, HUF is a popular legal tax-saving facility the government offers to the country’s citizens.
FAQs
Yes, HUFs must be legally registered through the filing of a legal document that acts as the HUF deed. Post-registering the deed, HUFs are required to apply for a separate PAN and bank account.
A sole proprietorship is a form of business that is owned and operated by a single individual. Hindu Undivided Family is an entity that is equally owned by the entire family but represented by the head, called the Karta. A HUF may or may not have a business.
The income tax limit for HUFs is the same that applies to individual taxpayers. The old regime offers a basic exemption limit of ₹2.5 lakhs, and the new regime offers a basic exemption limit of ₹3 lakhs.
No, HUFs are not eligible for rebate under 87A. Section 87A offers a rebate of ₹12,500 for individuals whose annual taxable income is less than ₹5 lakhs. This is applicable only to individual taxpayers.
HUFs can be opened by Hindu families alone. For the purpose of HUFs, the Income Tax Act includes Buddhists, Sikhs and Jains under the purview of HUFs. Muslim and Christian families are, however, not eligible to form HUFs.