How to Save Income Tax by Forming a HUF in India?

What is HUF (Hindu Undivided Family)?

India has a prevailing tradition of the joint family i.e. undivided family which is basically an extended family arrangement under many generations live under the same roof bounded by a common relationship. A joint family consists of a husband and wife, their sons and daughters and so on up to generations to come.

Generally a joint family is headed by senior most person of the family, normally called a karta, and he makes most of the economic, financial and social decisions on behalf of the entire family and his wife looks after all major and minor household practices and has considerable influence in all domestic matters and thus an HUF comprises of literally everyone in the family, wherein males of the family are included by default and females till they get married and also females who are married into the family.

All male members of an HUF are called coparceners whereas all female members are referred just as members and the main difference between the two is that while the coparceners can demand for partition at any point of time, the female members do not enjoy this right except for some states like Maharashtra and Tamil Nadu where unmarried female members also function as the coparceners.

As per Section 2 of the Hindu Succession Act 1956, anyone who is born into a Hindu family and it comprises a Virashaiva, a Lingayat or a devotee of Arya Samaj. A Hindu undivided family is a legal term related to the Hindu Marriage Act and though its reference is find in the provisions of the Income Tax Act, its expression is not found in the same. A Hindu family can pool in its assets to form a HUF and the option is open for Buddhists, Jains and Sikhs religions as well and every member is taxed separately. A Hindu undivided family has its own PAN and files tax returns independent of its members. Forming a HUF has its own share of advantages and disadvantages, such as:

Advantages of Forming a HUF

1. It is easier for HUF members to avail loans.
2. Common reason why most of the families opt for HUF is that they can opt for two PAN cards and file income tax separately wherein personal income of the family is not accounted as the HUF family.
3. Females are considered as a part of her husband’s as well as her father’s HUF and even thought she, i.e. females cannot start a separate account of herself because her husband is the karta, she can be the co-partner in the HUF.
4. In case of death of the last male member of the family, the official stature of the HUF remains same even in the hands of women.
5. Any assets or savings made or insurance premium disbursed by the HUF is subtracted from the net income for tax purpose.

Disadvantages of Forming a HUF

1. If you are forming an HUF with the sole aim of saving on taxes, this trick might work in the beginning because as the strength increases, the complications also increase.
2. An HUF is only recognized in India and not in other countries.
3. If the need arises, you cannot break the HUF just like that and would need consent of every member for the same.
4. Women cannot combine their separate assets with the property of the joint family.
5. An HUF is not allowed to become an equal partner in any company and only the karta i.e. the head of the family represents the HUF in an enterprise.
6. Since an HUF is quite large in number, at times financing an HUF is not easy.
7. In 99% of cases, partition of HUF land leads to clashes and court cases.
8. One of the greatest disadvantage of opening an HUF is that every member have equal rights on the property and needs mutual and common concurrence in case of any dispute or disagreement.
9. With the nuclear family trend taking over, HUF is losing its relevance

How to form an HUF?

An HUF is formed automatically at the time of marriage and starts a family and while it is formed on its own, it must be registered in its name. Documents needed form an HUF are as below:

1. Bank account in the name of HUF: Only this bank account can be used for making all expenses and investments of HUF and while opening a bank account, you must ensure that all relevant documents must be properly stamped.
2. PAN card in the name of HUF: Since an HUF is an independent identity from its members, you must obtain a PAN card for HUF.
3. HUF deed: An HUF deed is a formal legal and written document on a stamp paper having details of its Karta, coparceners and its business.

How is HUF taxed?

An HUF is taxed separately of its members and any exemptions allowed under tax laws or deductions under Section 80C can be claimed by HUF members separately. For example, if you along with your wife and three children decide to form an HUF, then the HUF along with you five can claim deductions under Section 80C. Moreover, an HUF has its own PAN Card and files its tax return separately. The key pointers of how an HUF is taxed can be summed up as below:

• An HUF is taxed at the same rate as an individual.
• Returns from investments made from HUF’s income are taxable.
• An HUF can take insurance policy on the life of its members.
• As an HUF you can claim any exemptions and deductions under Section 80C in income tax return.
• If HUF members contribute in its functioning, then an HUF can pay them the salary which can in turn be deducted from the income of HUF.

Tax implications of forming a HUF

Experts see an HUF as a major tax-saving asset and with some smart strategies you can utilize an HUF for getting deductions under Section 80C, such as:

1. Life Insurance Policies: One of the smart ways to get maximum tax benefit under Section 80C, the HUF can take out Life Insurance Policies in the name of its members and pay the premium amount through which you can claim tax deduction under the Section 80C of the Income Tax Act 1961.
2. Remuneration to Karta and its members: In case the karta of the HUF does not have a high income, the HUF can pay him and its members i.e. coparcener’s monthly salary, which will be taxed as income and can be fully deductible from the HUF income.
3. Loan to HUF members The HUF can also give loans to its karta and coparceners for setting up a business and charge interest on it. Interest paid on the loan is fully deductible.
4. Health Insurance Premium: As an HUF, you are entitled for a separate tax deduction in respect to payment of Health Insurance Premium, permissible under Section 80D of the Income-tax Act 1961. You can avail maximum deduction of Rs 15,000 per annum and if there is any senior citizen in the HUF, then the amount is increased to Rs 20,000 per annum.
5. The Family First Plan from Max Bupa Health Insurance: Max Bupa Health Insurance covers not just an individual and his family but also the extended family including 12 relationships and it is best suited for HUF because there is no upper limit on the number of people it can cover and the premium paid under this plan is fully deductible under Section 80D.
6. Distribute income to coparceners: One of the ways through which you can get maximum tax benefit of an HUF is by distributing its income to its coparceners, however this should be done from the income earned by the HUF.
7. Medical Treatment of a dependant member: As an HUF, if you are taking medical care of a dependant member with a disability, then you claim tax deduction up to Rs 50,000 and in case of severe disability, the claim can get enhanced up to Rs 1,00,000 under Section 80D of the Income Tax Act 1961.
8. Payment for the diseases/ailments mentioned in the Income Tax Act: If as an HUF you are making actual payments on the treatment of the diseases/ailments mentioned in the Income-tax Act, then you are entitled to claim tax deductions up to Rs 40,000 under Section 80DDB of the Income-tax Act 1961 and in case the expenditure is made for a senior citizen member of HUF, your deduction amount can be increased up to Rs 60,000.
9. Charity to trust: One of the noble ways to claim tax deduction under Section 80G of the Income Tax Act 1961 is to donate trusts and charities.
10. In case you are a salaried employee and your HUF is the owner of the house property from which you get monthly rent, you can make the individual payment of the rent to the HUF and obtain rent receipt which can be submitted to the employer and avail tax deduction on the HRA amount.