How to Save Tax by Forming HUF (Hindu Undivided Family)?

Different provisions of the IT Act help to plan tax saving in a smart manner.One such provision is forming a HUF (Hindu Undivided Family) . Here are some of the popular ways in which forming a HUF can help you save income tax-

As per the tax laws, HUF is a separate legal entity. It has its own PAN card and can also start a business or invest in equity, mutual funds , and FDs . As per the IT Act, HUFs can avail a tax exemption of up to Rs. 2.5 lakhs in a year.In other words, the family members who have formed a HUF can take advantage of their own income tax benefits as well as HUF income tax exemption of up to Rs. 2.5 lakhs.

An individual is only allowed to have a single self-occupied property as per the IT laws. In case if an individual owns more than one property, the other property will be considered as ‘deemed to be let out’. Tax should be paid as per the notional rent on such properties.However, HUFs are allowed to own residential properties and not pay any tax on the same. So, if a HUF member owns two properties, the other property can be in the name of the HUF to avoid paying notional rent tax.

Just like individuals, HUFs are also allowed to claim tax deductions on premiums paid for life insurance and health insurance So, a HUF member can claim a tax deduction of up to Rs. 1.5 lakh on premiums paid for a life insurance policy. Similarly, there are tax deductions of up to Rs. 25,000 on premiums paid for a health insurance policy.

Any Hindu, Jain, Buddhist, or Sikh family can form a HUF. The family should have a common ancestor, and all the lineal descendants of the ancestor can be part of the HUF.In most cases, the assets of a HUF come from a will or as a gift. It can also be an ancestral property, property purchased from funds acquired by selling a joint family property, or a property purchased by the HUF members.Family members wanting to form a HUF are advised to consult a professional to understand the tax implications and take the best advantage of the available tax provisions.

HUF means Hindu Undivided Family. You can lower your tax liability by creating a family unit and merging your assets into a HUF. Independent of its constituents, HUF is taxed. A collection of Hindu households can form a HUF. Buddhists, Jains, or Sikhs may also establish a HUF. HUF has its own PAN and submits tax returns separately from its members.

A HUF can claim any exemptions or deductions permitted by the tax laws since it is taxed independently from its members (e.g., under Section 80). For instance, if you, your spouse, and your two children decide to form a HUF, all four of you can claim a deduction under Section 80C of the IT Act. Families typically use HUF to accumulate assets. Let's examine this carefully.Here is how the HUF is taxed:

• The HUF files a separate tax return and has its own PAN. Since the Hindu family has a separate entity from its individuals, a separate joint family business is founded.
• The HUF may claim exemptions and deductions under Section 80C in its Income Tax Return (ITR) filing.
• HUF has the option to purchase life insurance for its members.
• If they help the HUF function, members of the HUF may get remuneration. The HUF revenue might be used to offset this salary expense.
• The income of HUF can be used for investments. Any profits from these investments will be taxed to the HUF.
• The same rates of taxation apply to HUFs as to individuals.

Advantages:

Because the account is the same as an individual's account, there are numerous HUF tax benefits, some of which are described below.According to Section 80C of the IT Act, HUF accounts are eligible for tax exemptions and deductions.Taxes are not due on gifts under Rs. 50,000. A parent who has a HUF account may offer something more valuable to his son who has a smaller HUF account, such as a house or money, but he must make it clear that the gift is for the son's HUF and not for himself. In this instance, provisions 64 (2) and 56 of the tax code provide tax benefits (2).Corpus may put money into things that make money without paying taxes.

Disadvantages:

The corpus of the account may remain empty due to a pervasive sense of unease among the members, and as long as the corpus is empty, the account is inoperable.The process of partitioning in deposit in a HUF account can become tiresome if any of the HUF members are willing to partition.Pay earners can also profit if they expect to earn additional money that they can claim in the name of a HUF, reducing their taxable income , even though they cannot channel their salary into the HUF.For instance, suppose a person makes Rs 12 lakh in salary and Rs 6 lakhs more from their business. Now, suppose he establishes a HUF and conducts business in its name. In that case, this entire income will be taxable under the HUF, and he can lower his tax obligation by taking advantage of incentives under several sections that would not have been possible had he obtained it in his own name.

Here are the deductions that HUF can claim:

• Income tax advantages: In the eyes of the law, a HUF is a separate entity. In this case, not only does the HUF have a PAN card, but so does every member of the family. A HUF has the ability to run autonomously and make money. Stock investing and mutual funds are further options. The HUF additionally benefits from a basic tax exemption of Rs. 2.5 lakh as a distinct business. Therefore, imagine that you establish a HUF with your spouse, your two children, and yourself. You are eligible for an additional Rs 2.5 lakh per year in basic income tax exemption in addition to the benefits you already receive from individual income tax perks.
• Possessing multiple homes: The Income Tax Act of 1971 states that if an assessee owns more than one self-occupied property, he or she may only claim one of them as a self-occupied dwelling; the others will be assumed to be rented out, and the assessee will be liable for paying tax on any fake rent. A HUF, on the other hand, is able to own a home and is not required to pay taxes.In addition, under Section 80C of the Income Tax Act, a Hindu Undivided Family is entitled to a tax credit of Rs. 1.5 lakh on loan repayments used to buy a house as well as an extra benefit of up to Rs. 2 lakh on home loan interest.
• Deduction of Life Insurance Premium: Individuals receive a tax benefit under the income tax act when they make a specific type of payment or transaction. The same is true for HUFs; if a HUF pays a premium on a member's life insurance policy, they are eligible to deduct that cost under Section 80C of the Income Tax Act. The highest deduction allowed by this section is Rs. 1.5 Lakh.
• Investments: A HUF may participate in fixed deposits and equity-linked savings plans to qualify for the deduction under Section 80C of the Income Tax Act of 1961 for an amount up to Rs 1.5 lakh. It may also claim a tax deduction for the sum that a HUF deposits in a member's PPF account.
• Medical Insurance: The maximum amount a person may deduct for the premium on health insurance is Rs 25,000, which is insufficient in situations where good health coverage is chosen.However, people who belong to a HUF receive an additional Rs 25,000 in annual tax benefits on their health insurance premiums. The cap is Rs 50,000 for people who fall within the senior citizen category.The tax advantage available when medical costs are incurred for a member who is physically disabled is Rs. 75,000; for severe disability, the amount is Rs. 1,25,000.It is crucial to remember that regardless of the costs, disabled members are eligible for a deduction under Section 80DD of the Income Tax Act of 1961.

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The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.