HUF stands for Hindu Undivided Family. HUF can be formed by Hindus, Jains, Buddhist and Sikh Families in India. As per Income Tax rules, HUF is a separate tax entity/unit. You can enjoy additional tax benefits as a family by forming HUF. If you are keen to know more about Hindu Undivided Family, continue reading this post till the end. You will learn about what is HUF? & How to form HUF for saving tax?
What is HUF?
HUF is a separate tax entity/unit called as Hindu Undivided Family. The family members of Hindu family (Indian citizen) can come together and form an entity called as Hindu Undivided Family. The main member of the family is known as Karta of Hindu Undivided Family.
The main objective here is to get a tax benefit as a family. In the case of the Hindu undivided family, a separate PAN card and bank account are required. The income accumulated in this account is known as the joint income of the family. This joint income does not levy any tax liability on the individual family member. The tax liability will be collectively imposed on family members. A separate return is required to file for this arrangement.
It is a legal way to save tax as a family. So, if you are interested to form HUF follow the process given below.
Also Read – How your Family can Help you to Save Taxes?
How to form HUF?
By default, HUF get formulated at the time of marriage. However, you need to formalize it by making a proper deed. The deed can be created at any time after marriage. It is not necessary to have children to form Hindu Undivided Family.
#1 Create Deed
The first step is to create a deed for HUF. The deed is executed on Rs.100 stamp paper. The deed is nothing but a declaration made by the eldest male member of the family known as Karta. This declaration is made in the presence of two witness.
The deed also mentions the name of family member’s including adults and minors covered under HUF. It also contains a source of fund gift received for forming HUF. The name of HUF is also fixed at the time of formation. It is generally the name of Karta followed by HUF. Suppose the name of Karta is XYZ, the name of his HUF would be XYZ HUF. The copy of a deed to be notarized by an advocate. You need to pay a nominal fee for getting document notarized.
The main family member of family “Karta” is can govern all transactions of HUF accounts on behalf of other family members.
#2 Apply for PAN card
You need to apply for separate PAN card after creating a deed. You can do that by filing a separate application using Form 49A. This form can be filed online as well as offline.
You are required to furnish documents such as residence proof, copy of Karta’s Aadhaar Card, copy of Karta’s voter ID or passport copy. If all documents are in order HUF’s PAN card will be allocated in 21 days.
#3 Open Bank Account as HUF
Once PAN number is allocated Karta needs to open a separate bank account for HUF. The bank will ask the PAN card number as well as deed copy while opening an account. Once an account is opened all transaction of HUF needs to be done via this account.
You also need to make square stamp mentioning the name of HUF. This stamp to be used while doing all HUF’s transactions.
How to Save Tax via HUF?
As discussed earlier the main objective behind forming HUF is saving tax. Here is a list of avenues of saving tax via HUF.
(1) Life Insurance Premium
As per provision of Income-tax Act, HUF can make life insurance premium payment for the individual covered under its umbrella. The amount paid via this method can be claimed for tax benefits under section 80C. The maximum tax exemption availed under section 80C via this method is 1.5 Lakh.
(2) Owning house
HUF can own property as a unit. This property could be ancestral property or self-purchased policy. If a property is owned by HUF, the ownership is equally divided among all family members. The property can be sold after the agreement of every family members. New members that get added in the family will automatically get rights to the property.
Owning property like this is one of the best ways to save tax on multiple properties. You must be aware that as per current income tax law if you own more than one property you need to declare one property as self-occupied and second as deemed let out or rented property. This means you need to pay tax on deemed let-out or rented property. If the same property is owned by HUF the entire liability of paying tax lies with them.
Let’s try to understand this via example. Suppose Mr.XYZ gets a property as an inheritance. The income via this property in terms of rent is 2.5 Lakh per year. If Mr.XYZ holds this property individually entire rent income will be considered as income of Mr.XYZ and he need to pay tax according to applicable tax slab. Mr.XYZ decide to form HUF with his wife. Under this case, the tax liability of a rented income of 2.5 Lakh per year would fall under HUF.
HUF can make investments in tax-saving deposits and equity-linked saving scheme to earn tax benefits. However, they cannot open a PPF account. The maximum tax benefit availed here would be 1.5 Lakh under section 80C.
(4) Health Insurance
As per section 80D, you can also claim a deduction of Rs.25000 per year on the premium paid for health insurance for your family members. The same limit is applicable to HUF if payment is made via their account.
(5) Salary Payment
Salary payment can be made by HUF to the family members for their contribution to its functioning. The expense incurred for the salary will be deducted to calculate HUF’s tax liability.
Advantage & Disadvantage of HUF
- A separate legal entity which is taxed separately. It will allow you to save more tax.
- The newborn child will automatically become a member of this unit without any formalities.
- Gift amount collected up to a worth of Rs.50000 via this entity will be tax-free.
- Corpus can be used for investment in tax-free investment instruments.
- An adopted child can also become member of this entity.
- Equal rights is assigned to every family member irrespective of their contribution.
- Once HUF is formed income tax return is required to be filed every year without fail till partition.
- Partition is difficult exercise. All family member should be agree and corpus should be equally distributed.
Like every other scheme, HUF has its own advantage and disadvantages. One should look at all legal and tax-saving aspects before forming HUF.