HUF Income Tax Benefits: How HUF Can Help You Save Tax

• Under the Income Tax Act, HUF is considered a separate entity and is therefore taxed separately.

• Forming an HUF allows you to optimise tax liabilities and provides an opportunity for family members to get tax benefits in the future.

• Like individuals, HUFs enjoy various tax benefits on their income, along with exemptions on investments, health insurance, and life insurance.

• HUF members can also claim exemptions and deductions on their investments and income.

The Income Tax Act offers various avenues for taxpayers to reduce their tax liabilities in a structured and legitimate manner. One such option is the formation of a Hindu Undivided Family (HUF).

Governed by Hindu law, HUF can be formed by a married couple or members of a joint family. It requires at least two members, with one member assuming the role of the 'Karta' (the head of the family).

In addition to Hindus, even Jains, Sikhs, and Buddhists can also form a HUF. The concept of HUF as a distinct entity for tax purposes was first recognised in 1917. Over time, many families have benefited from the tax advantages it offers. Let's understand it.

A HUF (Hindu Undivided Family) is a legal entity, which consists of individuals who are lineally descended from a common ancestor, typically including the Karta (the head of the family) and coparceners (family members with a birthright to the family property).

HUF is considered a separate legal entity and is therefore taxed separately. It has its own PAN and is required to file tax returns independently of its members.

The income tax slabs for an HUF are the same as that of an individual, with an exemption limit of ₹2.5 lakh. Members qualify for various tax benefits and exemptions under the Income Tax Act of 1961.

Also Read - Here's a quick guide on what's an HUF and its tax aspects

Here are the top 5 Tax Benefits available for Hindu Undivided Families (HUF):

Tax Exemption in Income Tax

HUFs are eligible for tax exemptions up to ₹2.5 lakh under the old tax regime and ₹3 lakh under the new tax regime on their income (without any exemptions or deductions under various provisions of the Income Tax Act, 1961, as per Section 115BAC).

The income tax slabs and rates for HUFs are the same as those for individuals. However, HUFs have their own income threshold and tax calculation. The Income Tax Act of 1961 governs these provisions and any amendments to the tax benefits.

Existing Income Tax Benefits

• The tax exemption available for HUF is in addition to the income tax benefits enjoyed by the members of the HUF individually.
• You can create an HUF for yourself, your spouse, and two children.
• You can get tax exemption individually and also avail of an additional basic income tax exemption of ₹2.5/₹3 lakh (as applicable) each year as an HUF.

Owning a house

Under the existing income tax laws, if you own multiple self-occupied properties, only one can be claimed as such, while the other properties are considered as "deemed to be let out". You must also pay tax on the notional rent. However, HUFs can own a residential property without being liable for tax.

Additionally, HUFs can also avail of a home loan to buy a residential property and claim tax benefits:

• Up to ₹1.5 lakh under Section 80C for principal repayment of the loan.
• Up to ₹2 lakh for the interest paid thereon under Section 24(b) of the Income Tax Act.

Life Insurance

Similar to individuals, HUFs can also avail of tax benefits on specific payments made during the year. They can claim tax deductions up to ₹1.5 lakh under Section 80C for paying life insurance premiums for members.

Additionally, the sum assured received under a life insurance policy is tax-free under Section 10(10D) of the Income Tax Act, subject to limits.

Health Insurance

An individual can claim a deduction of ₹25,000 annually on health insurance premiums paid for their family under Section 80D. However, with the increase in health insurance premiums, this limit may be insufficient when trying to provide comprehensive health coverage for your family.

As an HUF, the members can claim additional tax benefits of up to ₹25,000 on Health Insurance premiums paid during the year for family members of the HUF. For senior citizen members of HUF, the limit is ₹50,000.

Additionally, the entire amount spent on medical expenses for the health of any member of the Hindu undivided family can be claimed as a deduction, up to ₹50,000 per year. Expenses incurred for preventive health check-ups can also be claimed as deductions up to ₹5,000, but the total deductions under this section should not exceed the overall limits of ₹25,000 and ₹50,000, respectively.

Investments

An HUF can also invest in tax-saving fixed deposits, mutual funds and Equity Linked Savings Schemes (ELSS) to enjoy tax benefits and claim deductions up to ₹1.5 lakh under Section 80C.

While HUF cannot open a Public Provident Fund (PPF) account in its name, it can still claim tax deductions for contributions made to the Public Provident Fund accounts of its members.

Capital gains from the sale of equity-oriented mutual fund units held for over a year also qualify for reduced tax rates under Section 112.

Also Read - Here's how to plan your taxes under Section 80C

Forming an HUF can be a smart financial strategy, particularly for effective tax planning . By taking advantage of the various tax benefits available under the Income Tax Act and related regulations, you can optimise the financial well-being of your family, reducing tax liabilities while maximising savings and deductions.