The full form of HUF is 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 HUF account rules and regulations that need to be followed. 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.Read more
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Let us understand what is HUF, HUF advantages and disadvantages, and HUF account rules.
A Hindu Undivided Family (HUF) is a joint family, seen as a separate entity from the individual members in the HUF. The head of the family is called 'Karta,' who operates the business of the HUF. HUF typically has assets that come from ancestral property, a gift, a property acquired from the sale of joint family property, a will, or property donated to the common pool by members of HUF.
All the members of a Hindu family, including wives, and children, their wives and their children can be a part of HUF. The male members of a HUF are called coparceners, whereas the females are referred to as members. Only a coparcener can demand the partition of HUF.
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. Below are a few HUF account rules:
HUF should only be formed by a family.
HUF is automatically created for the newly added member of the family at the time of their marriage.
HUF in general consists of a common ancestor and all of his descendants including their daughters and wives.
Buddhists, Hindus, Sikhs and Jains can form HUF
HUF often has assets which come as a will, gift, or ancestral property
Once the HUF is created, the bank account should be created in the name of HUF. After that, A PAN number will be generated in the name of HUF
Every member of the family can deposit their income in the common corpus
Tax benefits are applicable on deposits under various sections
Corpus can be divided only on the agreement of every coparcener of the family.
Once you have learned the HUF account rules, here are three steps to create a HUF.
Step 1: Creating HUF Deed
Step 2: Applying for HUF PAN Card
Step 3: Opening Bank Account of HUF
Once the above three steps are followed, the HUF is then a separate legal entity. It can start receiving payments. The amounts received in the name of the HUF are not taxed in the hands of the individual members of the HUF.
The primary reason behind building a HUF is to get an additional PAN card which would be legally acceptable and to avail of the tax benefit. After building the HUF, the members falling under HUF will not have to pay taxes 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 account rules better:
Let's suppose a family consists of four members-husband, a wife, and their 2 children. The husband's annual income is Rs. 20 lakhs, and the wife's annual income 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 from the ancestral land would be taxed on either the husband or the wife or both of them. Let's see how it works:
If it is taxed on the husband, he currently falls under 30% of the income tax slab. Therefore, he would end up paying 30% of Rs 6 lakhs which will be 1.8 lakhs as the tax amount.
If it is taxed on the wife, as she also falls under the 30% of the income tax category, she will end up paying 30% of Rs. 6 lakhs which will be Rs. 1.8 lakh as the tax amount.
If it is taxed equally on both husband and wife, each of them would have to pay 30% of Rs 6 lakhs. It eventually means that both of them would have to collectively pay Rs. 90,000 + Rs. 90,000 = Rs. 1,80,000.
However, under HUF, one can enjoy additional tax benefits on the rent of the land. For a HUF member, the taxes would be reduced to an amount of Rs. 60,000 to 70,000. That means you will be able to save tax around Rs 1,80,000- Rs 60,000=Rs. 1,20,000.
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 siblings, his father's property was transferred under HUF.
Now, if the annual rent of his father's property is 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 before 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. 5,46,000||Rs. 3,82,200||Rs. 6,500|
Total tax paid by Mr. X & HUF
Tax savings after creating HUF
Both Mr. X and the HUF (including other members of HUF) can claim tax deduction u/s 80C.
Tax benefits are one of the major HUF advantages. These include:
Tax deductions can be availed under section 80C for the HUF account.
Gifts up to worth Rs 50,000 will be tax-free. A father who owns a HUF account can gift a property or money of higher worth to a son who owns a smaller HUF account. The gift should specifically be for the son's HUF. In such instances, tax benefits under sections 64(2) and 56(2) can be enjoyed.
Corpus can be used for investment in tax-free money instruments.
HUF's advantages and disadvantages are many, some of which are mentioned below.
Just like other individuals, even HUF members are liable to pay taxes every year. If the turnover of the business of a HUF member exceeds Rs.25 lakhs or Rs. 1 crore, s/he needs to perform a tax audit under the guidance of a certified Chartered Accountant as mentioned in the Section 44AB of the Income Tax Act.
The head of a HUF has all the power to sign the relevant documents on behalf of other family members. They also have the right to permit any other older member of the family to carry out the activities.
An adopted child may also become a member of the HUF.
HUF is recognized all over India except Kerala.
One of the main reasons families forms HUF is that it helps them create two PAN cards and file taxes separately.
Members of HUF can easily avail of loans.
One of the primary disadvantages of 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 the dissolving of the HUF. After closing down a HUF, assets of the family need to be distributed among all the family members, which is sometimes very difficult to manage. In addition to that, legal hassles create more disturbances in it.
HUF is considered a separate tax entity by the income tax department. But in today's time, joint families are increasingly losing their importance and relevance. Several cases are coming out these days where HUFs are fighting over petty issues or 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 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 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.
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