Meaning:-
HUF means a Hindu Undivided Family and for the purpose of Income Tax, It is an entity separate from its members. Although an HUF is governed by Hindu Law Board , even Jains, Sikhs and Buddhists can form an HUF. An HUF has a separate PAN and the Return of Income of an HUF must be filed separately than those of its members.
Formation of a HUF:-
A HUF is created automatically at the time of marriage, A single person cannot constitute HUF. The members of HUF include a common ancestor and all the lineal descendants which include wives and unmarried daughters. The senior most male member of the family is known as the Karta while the rest of the members are known as Coparceners. HUF can be registered by a simple HUF deed or an affidavit , and can apply for a PAN and a bank account.
Benefits of HUF:-
- HUF is a separate legal entity for Income Tax purpose and has to file a separate Income Tax return.
- Remuneration paid to Karta and other members of the HUF are allowed as deduction under Income Tax.
- HUF can claim deductions under Chapter VIA while calculating its Total Taxable Income.
- HUF is taxed at the same rates as individual. However, Rebate from Income tax that is available to Individual Taxpayers is not available to HUF.
- HUF can be used as an effective Tax planning tool.
- Insurance policy can be taken by HUF on the life of its members and the same can be claimed as deduction under section 80C.
How HUF helps to save tax can be understood with the help of the following example:-
Suppose, Mr. X earns salary of Rs. 15,00,000/- p.a and his wife earns the same salary too. Mr. X has an ancestral property which generates a rent of Rs. 5,00,000/- p.a. Now Consider the following scenarios
Scenario 1) The property is held in the name of Husband or wife:- The rent part i.e Rs 5,00,000/- , after standard deduction of 30% will attract a Tax of Rs. 1,09,200/- (inclusive of Health and Education cess)
Scenario 2) The property is held in the name of both Husband and wife:- The rent part will attract a Tax of Rs. 54,600/- (inclusive of Health and Education cess) each in the hands of husband and wife.
Scenario 3) If the Property is held in the name of Mr. X’s HUF and the HUF has no other income, HUF can avail the benefit of slab of Rs. 2,50,000/- and the total tax liability would be Rs.13,000/- (inclusive of Health and Education cess). Thus, in this case forming an HUF results in Tax Savings of Rs. 96,200/-.
Hence, HUF is seen as a very effective and legal tool for saving taxes.
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