HUF and saving tax

What is HUF and how you can save additional tax with HUF?

Understanding HUF

HUF – ‘Hindu Undivided Family’ is a unit comprising of the members of the family that is formed in a family following Hinduism, Sikhism, Buddhism, Jainism only. HUF is a separate entity having its own assets and liabilities and is considered as a separate accessee while filing income tax and thus provide opportunity to save additional taxes.

Composition of HUF

HUF is family unit comprising of COPARCENERS and MEMBERS. All persons born in the family are called coparceners and all other members that became a part of the family through marriage etc. are called members of the HUF. The eldest of the Coparceners is called the KARTA and is responsible for the activities of the HUF.

Example: Consider a family of Husband and wife with 1 son and 1 daughter. Both the offsprings are married and have one child each. Now let’s see the composition of HUF in this family:

  • Total family members: 8
  • KARTA of the HUF: 1 (the eldest member, Husband in this case)
  • COPARCENERS of the HUF: 4 (Born in the family – Husband, Son, Daughter, Grandchild through son)(Karta is also a copercener)
  • MEMBERS of HUF: 4 (Not born in the family – Wife, Daughter in law, Son in law, Grandchild through daughter)

Steps to create HUF

  • Deed of agreement (On a stamp paper and notarized. Serves as a document proof to complete other steps.)
  • Get a PAN for the HUF
  • Open a bank account of the HUF. And you are done.

How HUF acquire assets?

  • Transfer of ancestral property of the family into HUF. Once transfered to HUF the rights to the property will be with all coparceners.
  • Transfers from individuals to HUF
  • Gift from others
  • Purchase of assets by HUF

Income heads allowed in HUF

All income heads except income from salary are allowed in HUF like income from house property, profit and gains from business and profession, income from capital gains.

How does HUF help in saving tax?

Let’s go through this very basic example considering only the deduction of 1,50,000 allowed under section 80c (old tax regime) for an individual earning 30 lacs in a year vis-a-vis when the same income is distributed between individual and the HUF.

INDIVIDUAL 30,00,000: Deduction (80c) 1,50,000. Taxable income 28,50,000. Total tax 6,67,500 (Considering the current income tax slab FY 2023-24)

Now, when the income is distributed into INDIVIDUAL 20,00,000 + HUF 10,00,000: Deduction (80c) 1,50,000 each for both accessee, Taxable income individual 18,50,000 & HUF 8,50,000, Tax for individual 3,67,500 & HUF 82,500. Total tax 4,50,000.

TOTAL TAX SAVED: 2,17,500

Note: To get tax benefit as per IT act minimum 2 COPARCENERS are required in a HUF.

More points to know

  • Karta of the HUF manages the HUF and is responsible for all the decisions of the HUF.
  • Similarly, only Karta has unlimited liabilities. If the HUF have liabilities, it is the responsibility of the Karta alone to pay off the liabilities.
  • Eldest copercener whether a male orange female can bethe Karta of the HUF.
  • Only the coparceners, including the Karta, are the owners of the assets of the HUF and not the members.
  • Total 4 generations can be part of an HUF
  • HUF can be formed with minimum 1 coparcener and 1 normal member.

Read: If you want to create wealth through mutual funds, you need to keep these things in mind.

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