The term HUF stands for Hindu Undivided Family. Indian Citizens with Hindu ethnicity can come together and save a good amount of taxes by creating a HUF. There are certain rules and regulations to be followed by HUF. One of such rules is individual and separate PAN for HUF, using which the member can file their returns.
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However, most of the people are not aware of the benefits given to a Hindu Undivided Family. There are many Hindu families in India, which are yet not divided, and the income accumulated by those families is considered as the joint income.
The most interesting thing about this fact is that these joint incomes do not impose a tax on specific individuals, rather it is imposed collectively on all family members.
One of the most important reasons for forming a HUF is to get additional tax advantages. However, before doing so, one should be aware of the terms & conditions required to create a HUF:
The primary reason behind building a HUF is to get an additional PAN card which would be legally acceptable, as well as to avail the tax benefit. After building the HUF, the members falling under HUF will not have to pay tax individually. As the new HUF PAN card is created, the family can start paying its taxes individually.
The HUF can then start using the new PAN card to file the ITR. If the annual family income exceeds the prescribed limit, the family will be taxed at 10%, 20% and 30% of the income in the slab.
Here’s an example to help you understand the concept of HUF better:
Let’s suppose, a family consists of four members-husband, wife and their 2 children. The annual income of the husband is Rs 20 lakhs and the annual income of a wife is Rs 16 lakh. Besides that, they earn a rental of Rs 6 lakhs per annum from their ancestral land.
Keeping the annual individual income separately, the rent coming from the ancestral land would either be taxed on a husband or on the wife or both of them. Let’s see how it works:
Let’s suppose an individual Mr X, decides to start a HUF including his wife, son & daughter after his father passes away. Since Mr X doesn’t have any sibling, his father’s property was transferred under HUF.
Now, if the annual rent of his father’s property is of Rs 7.5 lakhs and Mr X has a salary income of Rs 20 lakhs; he can save taxes as given below:
Income from different sources |
Income of Mr X creating HUF |
Income of Mr X after creating HUF |
HUF Income |
|
Salary |
Rs. 20 lakhs |
Rs. 20 lakhs |
- |
|
Property rent |
Rs. 7.5 lakhs |
– |
Rs. 7.5 lakhs |
|
Standard deduction on the property |
Rs. 2.25 lakhs |
– |
Rs. 2.25 lakhs |
|
Income from Property |
Rs. 5.25 lakhs |
– |
Rs. 5.25 lakhs |
|
Total taxable income |
Rs. 25.25 lakhs |
Rs. 20 lakhs |
Rs. 5.25 lakhs |
|
Section 80C |
Rs. 1.5 lakhs |
Rs. 1.5 lakhs |
Rs. 1.5 lakhs |
|
Net taxable income |
Rs. 23.75 lakhs |
Rs. 18.5 lakhs |
Rs. 3.75 lakhs |
|
Tax payable |
Rs. 5,53,625 lakhs |
Rs. 3,91,400 lakhs |
Rs. 7,725 |
|
Total tax paid by Mr. X & HUF |
Rs. 3,99,125 |
|||
Tax saving after creating HUF |
Rs 1,54,500 lakhs |
Due to the aforementioned tax arrangement, Mr X managed to save tax of 1 lakh 54 thousand, five-hundred rupees. Both Mr X and the HUF (including other members of HUF) can claim tax deduction u/s 80C.
There are many advantages of forming the HUF but there are disadvantages, too of building a HUF. Here’s a look at the disadvantages of creating a HUF:
One of the primary disadvantages of building a HUF is that every member of the family has the same rights on every asset of the family. The common property cannot be sold without getting the consent of everyone in the family. Besides that, birth and marriages increase the number of family members.
Closing a HUF is much tougher than opening or building a HUF. Partition of the family with a small group may lead to dissolving of the HUF. After closing down a HUF, assets of the family needs to be distributed among all the family members which are sometimes very difficult to manage. In addition to that, legal hassles create more disturbances in it.
HUF is considered as a separate tax entity by the income tax department. But in today’s time, the joint families are increasingly losing their importance and relevance. There are several cases coming out these days, where HUFs are fighting over petty issues or about the property. Also, it is observed that day by day, the case of divorces is increasing. As a result of all these factors, HUF is losing its relevance as a tax saving tool.
Like every other scheme, HUF to has good and bad aspects associated with it. So, keeping these things in mind the HUF members should act towards their assets and property. The Karta should be aware when it comes to giving the property to any particular family member as a gift. The specific individual would only be able to receive the property by following the legal norms.