Smart Tax Planning through the creation of an HUF

The Hindu Undivided Family (HUF) is a well-established mechanism for tax planning in India. In this article, we will explore the complexities of HUFs, including their formation, essential components, taxation aspects, and the substantial tax-saving advantages they provide.

Understanding the HUF: Karta, Coparceners, and Members

Karta

At the heart of every Hindu Undivided Family (HUF) is the Karta, the individual responsible for managing its affairs.
Traditionally, the Karta is the eldest male member of the family, tasked with making financial decisions and overseeing asset management.
Upon the Karta’s death, leadership transitions to the next senior male member.

Coparceners

Coparceners are integral to the HUF, consisting of male and female descendants within four generations from a common male ancestor.
This group includes individuals born into the family as well as those adopted.
Importantly, due to a significant legal amendment in 2005, daughters also have coparcenary rights, maintaining their status even after marriage.

Members

Members of the HUF include spouses, children, and their offspring, all of whom contribute to the family’s collective assets.
While coparceners have the right to seek partition and can become the Karta, members are entitled to maintenance and a share of the HUF’s assets upon partition but cannot initiate partition themselves.

Formation and Composition of HUF

A Hindu Undivided Family (HUF) can be established by Hindus, Sikhs, Jains, and Buddhists. It must be formed by a family unit.
To create an HUF, a deed must be executed on stamp paper. Following the execution of this deed, a Permanent Account Number (PAN) is applied for in the name of the HUF. Once the PAN is obtained, a bank account can be opened in the HUF’s name. HUF is also eligible to get GST Registration. Learn more: GST Registration for Hindu Undivided Family
The assets of an HUF typically consist of common ancestral properties, gifts, proceeds from the sale of joint family property, property acquired through a will, and contributions made by HUF members to the common fund. This method helps in creating the corpus for the HUF.

Taxation Aspects of HUF

A Hindu Undivided Family (HUF) is taxed separately like individuals, possessing its own PAN and filing an independent income tax return. The following tax benefits are available to an HUF:

Tax Rates and Exemption: HUFs are taxed at the same rates as individuals and enjoy the same basic exemption limit.
Coparcener Requirement: There must be at least two coparceners to qualify as an HUF for taxation purposes.
Deductions: As a distinct entity under the Income Tax Act of 1961, an HUF can claim separate deductions. These include:
- Up to Rs 1.5 lakh under Section 80C
- Medical insurance premiums for family members under Section 80D, up to Rs 25,000, and up to Rs 50,000 if any member is a senior citizen
- Deductions under Section 80TTA up to Rs 10,000, and for senior citizens, up to Rs 50,000
Capital Gains Exemption: HUFs can claim exemption from capital gains under Section 54.
Home Loan Interest Deduction: HUFs can claim deductions under Section 24B for interest paid on a home loan.
Business Activities: An HUF can engage in business activities, provided the funds used belong to the HUF. The HUF can also pay salaries to its Karta and other family members involved in business operations.

Other Deductions

Gifts: Gifts up to Rs 50,000 received from non-relatives are not taxable.
Investments: HUFs can open DEMAT accounts and make investments accordingly.
Multiple Homes: According to Indian Income Tax laws, owning more than one home that you live in yourself results in only two homes being treated as your own residence, with taxes payable on others deemed to be let out. However, if registered as an HUF, multiple homes can be owned without paying taxes on them.

It’s important to note that if a member transfers his self-acquired property to the HUF without proper sale consideration, the income from such property is not taxable in the hands of the HUF. Instead, it continues to be taxed in the hands of the member who made the transfer.

How can the creation of a Hindu Undivided Family (HUF) serve as a smart tax planning strategy?

Creating an HUF is a smart tax planning strategy in India. Because, an HUF is taxed separately, benefiting from the same tax rates and exemptions as individuals.

Thus, it can claim deductions under Sections 80C, 80D, 80TTA, and 24B, as well as exemptions on capital gains and gifts. HUFs can engage in business activities, pay salaries to members, and make investments through DEMAT accounts.

Owning multiple homes without paying additional taxes is also possible under an HUF. If you need to know more about how HUF creation can help you save taxes, it is best to consult a CA. You can consult our experienced and professional team of CAs.