A legal and efficient way to save taxes – HUF

Important legal and efficient way to save taxes – HUF (Hindu Undivided Family)

HUF means Hindu Undivided Family. By creating a family unit and pooling in assets to form an HUF, you can save taxes. HUF is taxed separately from its members. A Hindu family can come together and form an HUF. Buddhists, Jains and Sikhs can also form HUF. HUF has its own PAN and files tax returns independent of its members. HUF is a family which consists of all people lineally descended from a common ancestor and includes their wives and unmarried daughters.

An effective and legal way to save tax is HUF. In India, there are many families which are undivided and the income earned by such families is joint income as compared to Individual incomes. As these are joint incomes and not Individual Incomes, these incomes cannot be taxed as being in the hands of any specific individual and are therefore taxed as being in the hands of the whole family. As these are taxed as being in the hands of the family, the family has a separate PAN Card, which is different from Individual members of the HUF who also have their own individual PAN Cards.

As a new PAN Card would be allotted to the whole family, it will also enjoy the benefits of Income Tax Slab Rates i.e. Income would be Tax Free up to the specified limits and would then be taxed progressively at 10%, 20% & 30% resulting in tax saving.

HUF tax saving can be understood with the following example. In a family of four – two children, husband and wife have income and they are paying tax at 30% slab rate. If they get an income from their ancestral property, say rent of 8 lakhs p.a., then they have to pay 2.4 lakhs as tax.

In case the rental income of Rs.8 lakhs is taxed as being in the hands of HUF, the tax payable by HUF will be say Rs.60,000 (depending on the income claimed by the HUF). So the net saving will be 2.4 lakh -0.6 lakh = 1.8 lakhs.

Members:- 

“Hindu undivided Family (HUF) easy to make, but difficult to break”

A HUF is a separate entity that can be created by members of a family, wherein the members are lineal ascendants or descendants. Hindus, Buddhists, Jains and Sikhs can open HUFs.

Senior most member of the family is considered the karta/ head/ Manager, the person who manages the affairs of HUF. The HUF continues to exist even after the death of common ancestor and the next eldest member becomes the head of the family. HUF usually has assets* which come as a gift, a will, or ancestral property, or property acquired from sale of joint family property or property contributed to the common pool by members of HUF. However, all the family members are not required to live under the same roof and they can continue to live separately.

Once a HUF is formed, it must be formally registered in its name. An HUF should have a legal deed. The deed shall contain details of HUF members and the business of the HUF. A PAN number and a bank account should be opened in the name of the HUF.

An adopted child can become a member of the HUF but he cannot become a co-parcener. The difference between a member and a co-parcener is that the co-parcener cannot ask for partition of the HUF. The HUF may be a resident or a non-resident in India depending on where the control of the HUF is residing.

The paperwork required for an HUF is:-

1. Obtain PAN number in the name of the HUF.
2. Open a bank account in the name of the HUF.
3. Open Demat account in the name of the HUF.
4. Use the HUF’s bank account to make all investments / expenses.
5. Maintain proper documentation and books of accounts to keep own investments and investments of HUF segregated.
6. KARTA of the HUF will have the power to sign all the documents on behalf of the HUF.
7. Income tax return to be filled separately for the HUF.

• Deductions under section 80 and other exemptions can be claimed by the HUF in its income tax return.
• HUF can take an insurance policy on the life of its members.
• HUF can pay salary to its members if they are contributing to its functioning and work of the joint hindu family business. This salary expense can be deducted from the income of HUF.
• Investments can be made from HUF’s income. Any returns from these investments are taxable as being in the hands of the HUF.
• An HUF is taxed at the same rates as an individual.

We hope you have got answers to all your questions regarding the documentation process attached to the HUF and its amazing benefits. In the next month, we would share with you the exact tax benefits arising out of HUF, certain drawbacks and other details.