Saving taxes with a HUF account. Advantages and Disadvantages of Creating a HUF

Hindu Undivided Family (HUF) is one of the effective and legal ways to save tax. Many families use the concept of HUF for the common wealth pooling of individual income. It is essentially a judicial person with whom you can split your income and reduce your tax liability. In this article, I will take you through the details to help you understand what exactly HUF is, how it can help you save taxes, and what its advantages and disadvantages are.

What is a HUF?

The concept of HUF is to treat your family like a different unit and pool the assets into a common unit. Apart from Hindus, Buddhists, Jains, and Sikhs can also form a HUF. 

To understand HUF in detail, check out this video from CA Sumeet Maru.

How is HUF Created and Operated?

As the name suggests, only a family can create a HUF, not an individual. When a man and a woman marry, a HUF comes into existence automatically, and the members of the HUF consist of descendants of a common ancestor, including their wives and unmarried daughters. You will also need to register it legally, and a legal deed should support its formation. It is labeled with the name of the Karta, who is in charge of the family's affairs. He should have a separate PAN card and HUF account in a bank. 

Taxation Example

As shown above, due to the formation of a HUF, Mr Kapoor has been able to save Rs 93,600 due to the formation of a HUF. HUF and Mr Kapoor can claim separate benefits under Section 80C. Also, the taxation entities, i.e. Mr Kapoor and the HUF, are separate. This means that the tax liability is reduced. 

Important Points to Remember

1. The HUF head, or the Karta, has all the rights to sign the relevant documents on behalf of his members.
2. The wife of the head of the HUF can be a co-partner, but her income can’t be added to it.
3. The official stature of HUF remains unchanged even if the head dies.
4. An adopted child can become a member of HUF but not a coparcener. That means the adopted child can’t ask for partition.
5. HUF is accepted all around India, except in Kerela.

Advantages and Disadvantages of HUF

In terms of income tax, the HUF has a number of advantages. When compared to individual incomes, you can get a lot of HUF account perks.

HUF Tax Benefits

Here are some HUF tax benefits you can avail of:

1. HUF can take life insurance in the names of HUF members and claim deductions under Section 80C of the income tax slab on its premium to avail of HUF tax benefits on income tax. 
2. It can also pay salaries to its members from HUF accounts and claim the pay-outs under deductions.
3. According to the current Income Tax laws, you can claim only one self-occupied property and the remaining properties are ‘deemed to be let out’. You will need to pay tax on National rent on them. However, a HUF can own a home without paying taxes. It can also take a home loan and benefit under Section 80C of the Income Tax Act for loan repayment up to Rs. 1.5 lakh and Rs. 2 lakh for interest.
4. It gets a separate PAN card for HUF taxation.
5. It can benefit from a basic tax exemption of Rs 2.5 lakh, make investments, and run businesses.
6. HUF can invest in Equity Linked Savings Schemes and Fixed Deposits to save taxes up to Rs 1.5 lakh in tax benefits.
7. It can claim tax benefits for depositing money in the PPF accounts of its members.
8. Gifts from someone with a HUF account to another of up to Rs. 50,000 will be tax-free.  

To know how to save tax with HUF, you can watch this video by Yadnya Investment Academy.

Drawbacks of HUF

While HUF offers many advantages, such as tax deductions and savings to the members of the family, it also has some drawbacks.

1. To be documented by income tax officials, a HUF must demonstrate some earning assets for each member as a gift from close relatives or via a Will.
2. The head of the HUF can’t gift or alienate HUF property, except for certain gifts to female members. He can gift his wife, daughter, son, and daughter-in-law immovable property under a reasonable limit.
3. The HUF property is not transferable since all coparceners own it equally and can only be sold if all HUF members of the family agree to it. As a result, HUF partition often results in clashes and court cases.
4. The HUF can’t become an equal partner in any company. However, the head or the members of the family can represent a HUF in a company, but their income will be taxed under the HUF income tax slab.
5. HUF can only be financed via inheritance or gifts, and any gifts from non-family members exceeding Rs. 50,000 are taxable.
6. It is not recognised in other countries, so income assessment becomes difficult with members moving abroad. 
7. HUF can only break if every member agrees, and women can’t include their individual properties with HUF.
8. It can be easy to save taxes with HUF initially, but it becomes quite a hassle with passing time. Also, it works only if you have a high-income level from a handful of sources.

Conclusion

Since HUF is considered a separate individual and is taxed accordingly, it can avail tax deductions and tax exemptions under the Income Tax Act. Therefore, make sure you create a balanced HUF and consider its advantages and disadvantages before forming a HUF.

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