Are there tax benefits to forming an HUF? Here are some points to keep in mind while doing so
The Hindu Undivided Family (HUF), as the name suggests, comprises a family whose members have lineally descended from a common ancestor, and also includes wives and unmarried daughters. It can be formed by a married person whether he is a Hindu, Jain or Sikh. The head of an HUF is called the karta and members are called coparceners. Before 2005, only male members were considered coparceners and females were called members with no rights to demand a partition or receive an equal share of its assets. However, the Hindu Succession (Amendment) Act 2005 gave women the right to be coparceners. Why does one need to form an HUF? Since the entity enjoys tax incentives separate from those availed of by individual members forming the HUF, tax saving is considered one of the biggest advantages and recognised as a legitimate way of reducing one’s tax outgo. HUF is a separate legal entity with its own bank account and PAN card, and has to file its own tax returns. It has the choice of opting for the old or the new tax regime.All the members of an HUF can pool in their individual assets, and these can also come as gifts from relatives and friends, through a will, include ancestral property, or property acquired from the sale of joint family property, or property contributed by its members. The income thus generated is taxed separately at slab rates applicable to individuals. It also enjoys the same exemptions and deductions as are valid for individuals, such as those under Section 80C (Rs.1.5 lakh), 80D (Rs.25,000, and Rs.50,000 in case of senior citizens), 80DD (up to Rs.1.25 lakh), 80DDB (Rs.40,000, and Rs.1 lakh in case of senior citizens), and 80TTA (Rs.10,000, and Rs.50,000 for seniors). It also gets the basic tax exemption of Rs.2.5 lakh. An HUF can also have a residential property without having to pay any tax on it. If a person has more than one property, the second property is ‘deemed to be let out’ and tax has to be paid on the notional rent. If, however, he puts the other property in the name of the HUF, he can avoid paying tax. Besides, the HUF can avail of a home loan to buy a residential property, enjoying tax benefits up to Rs.1.5 lakh under Section 80C for the principal amount repaid, and up to Rs.2 lakh for the interest paid on the loan.
Besides, the following incomes are not taxed as those of HUF: a. If a member has converted or transferred without adequate consideration his self-acquired property to family property, income from such property is not taxable. b. Income of impartible estate (though it belongs to family) is taxable in the hands of holder of estate, not the HUF. c. Personal income of members cannot be treated as income of HUF. d. Streedhan is the absolute property of a woman and any income arising from it is not taxable as income of HUF. e. Income from individual property of the daughter is not taxable for HUF even if this property is vested in HUF by her. While the HUF helps cut one’s tax liabilities, it also has drawbacks which must be kept in mind. A big disadvantage is that all the assets in the HUF belong to all the members. Hence, everyone has an equal right to these and the assets cannot be sold without everyone’s consent. Secondly, it is very difficult to dissolve the HUF unless all the family members agree to a partition. Even after it is dissolved, the distribution of assets among all members to their satisfaction poses a problem, often leading to legal disputes.
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This story originally appeared on: India Times - Author:Faqs of Insurances
