Hindu Undivided Family (HUF)

Did you know that forming a Hindu Undivided Family (HUF) can help you lower your overall tax liability while staying within the legal framework?

The Hindu Undivided Family Act first came into existence in 1956. Since its inception, a minimum of two coparceners are needed to exercise the effects of the law. Additionally, from September 9, 2005, female members could also register themselves as coparceners of the HUF. 

For a comprehensive understanding of the Hindu Undivided Family rules, you can go through this blog. 

Quick Summary

• HUF is recognised as a distinct taxable entity under the Income Tax Act, separate from its individual members.
• HUFs are eligible for the same tax exemptions and deductions as individuals, including a basic exemption limit of ₹2.5 Lakhs per year. 
• By creating a HUF, families can manage ancestral assets, investments and property under one umbrella and perform efficient tax planning.

What is a HUF?

A HUF, or Hindu Undivided Family, corresponds to a joint family setting where the individual members are treated as separate taxable entities when calculating the family's overall tax.

According to Section 2(31) of the Income Tax Act, 1961, HUFs are considered a completely separate entity for tax assessment. Here, the primary member or 'head' is called a 'Karta' who manages the transactions of a HUF. 

What are the Tax Benefits of an HUF?

A HUF enjoys several Hindu Undivided Family Act benefits, including eligibility for the same tax exemptions and deductions applicable to individual PAN. Below, you can see the complete list of HUF tax benefits:

Basic Tax Exemption

There is a yearly income tax exemption limit for HUFs if their cumulative annual income is less than or equal to ₹2.5 Lakhs. To claim this benefit, HUFs can file ITR-4 to declare the specifics of the profits of their business. 

Tax Deduction Under Section 80C

Like individual taxpayers, HUFs too are eligible for annual income tax deductions of up to ₹1.5 Lakhs. To avail this benefit, a Karta can consider any of the following investments/ instruments:

• Public Provident Fund (PPF) contributions
• National Savings Certificate
• ELSS
• Sukanya Samriddhi Yojana (SSY)
• 5-year tax-saving fixed deposits
• Life insurance premiums
• Home loan repayment
• Senior citizen saving scheme
• Pension plans
• Tuition plans
• Stamp duty and registration costs

Excluding these contributions, HUFs with incomes above ₹4 Lakhs but not exceeding ₹8 Lakhs are subject to a 5% yearly tax rate. Hindu Undivided Families (HUFs) are taxed at the same slab rates as individual taxpayers. They can choose between the old and new tax regimes based on income level and available deductions. 

LTCG Tax Exemption on Equity 

With separate Demat accounts, both a HUF and one of its members qualify for the ₹1.25 Lakh annual long-term capital gains (LTCG) exemption. However, yearly gains above this threshold are taxed individually from both the demat accounts at 12.5% annual interest. 

Capital Gains Tax Benefits on Selling a Property

As per Section 54 of the Income Tax Act, HUFs can reinvest the money gained from selling a residential property and will not have to pay taxes for profits up to ₹50 Lakhs. However, for this rule to apply, they must use the amount to buy another residential property. 

Home Loan Tax Advantages for a Joint Ownership

Suppose you take a home loan where you are a member of an HUF, and the HUF is both a co-borrower of the loan and a co-owner of the property. In this scenario, both entities can claim up to ₹3 Lakhs in tax deductions altogether. Here is how:

• Section 80C allows income tax deductions of up to ₹1.5 Lakhs while an individual/ HUF is making principal repayments
• Additionally, Section 24(B) offers a tax rebate on interest repayment for up to ₹2 Lakhs yearly. 

So, merging your income stream with an HUF boosts tax advantages and also enhances your overall home loan eligibility.

Savings Credit to a HUF Bank Account

Many people may not be aware that it is possible to transfer ancestral assets to a HUF or to transfer any existing savings into it. In short, you can give your HUF up to ₹4 Lakhs completely tax-free.

Income Tax Deduction as per Section 80D

HUFs can deduct up to ₹25,000 from their taxable income for health insurance premiums paid for members under 60 years old. A deduction limit of ₹50,000 applies to health insurance premiums for senior citizens.

Tax Deductions Through Section 80G Donations

The HUF can also donate to charities and deduct Section 80G donations from their taxes. Depending on the institution selected, this deduction can be up to 100% of the donated amount. 

Difference Between HUF and Individual Tax Savings 

If you are looking to maximise your tax savings and understand the best approach for your financial planning, explore the table below for a clear comparison between HUF and Individual tax benefits.

Final Words 

Grasping the effects of the Hindu Undivided Family Act and implementing its rules can turn out to be a smart choice. Besides saving tax, you can boost collective cohesion among the individual family members. Overall, it helps you kickstart a journey towards creating a tax-optimised portfolio for your family. 

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