The term ‘Hindu Undivided Family’ or HUF has not been defined under the Income Tax Act. HUF defined under the Hindu Law as a family that consists of all persons lineally descended from a common ancestor, including wives and unmarried daughters. HUF is not formed by a contract but by the status of a family and is created automatically when a person marries and starts their family. An HUF is eligible the exemptions that are available to a resident Indian barring senior citizens. An HUF can own property and also have its own business.
In a nuclear family, if the husband forms a HUF, with him the Karta (head of the HUF), his children will be called coparceners and his wife will be a member. Therefore, an individual can invest the HUF income in life insurance policies, PPF accounts, ELSS in the name of Karta, coparceners or member of the HUF and it will get income tax deductions under Section 80C.
How does HUF help in saving on taxes?
HUF is treated as a separate taxable entity, which is entitled to the same exemptions as any other individual taxpayer and enjoys the same deductions as any other taxpayer. This effectively gives the ‘Karta’ additional basic tax exemption of 2.5 lakh per year on taxable income, an additional tax deduction under Sections 80C, 80CCF and 80D, along with the benefit of lower tax slabs.
It is possible that if an HUF is created by that individual, he will be able to claim higher tax deduction and exemptions under the Income-tax Law because the new tax entity in the form of a HUF will be eligible to claim separate tax deduction of 1.5 lakh under section 80C of the Income-tax Act, 1961. Many taxpayers, including salaried professionals, small businessmen, even retirees, use HUFs to save tax.
Furthermore, the gifts received by the coparceners/member (beyond the exemption limit) can be shown as received by the HUF, thereby reducing the income tax burden of both the Karta and the member.
How is HUF taxed?
- HUF has its own PAN and files a separate tax return. A separate joint Hindu family business is created since it has an entity separate from its members.
- Deductions under section 80 and other exemptions can be claimed by the HUF in its income tax return.
- HUF can take a life insurance policy for its members.
- HUF can pay a salary to its members if they contribute to its functioning of the HUF. 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 in the hands of the HUF.
- A HUF is taxed at the same rates as an individual.
There are a variety of legal ways that can help you save on taxes and HUF is one of them. Smart usage of options available will enable a person to save substantial amount of money while filing income tax return.