What is HUF | Tax Benefits of HUF| Drawbacks of HUF
- Yogesh Suthar
- Nov 10, 2020
- 4 min read
HINDU UNDIVIDED FAMILY (HUF)
Hindu Undivided Family (‘HUF’) is treated as a ‘person’ under section 2(31) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’). HUF is a separate entity for the purpose of assessment under the Act.
Under Hindu Law, a HUF is a family that consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. A HUF cannot be created under a contract, it is created automatically in a Hindu Family.
The Hindu Law even though does not govern Jain and Sikh families, but they are treated as HUF under the Act.
Advantages of HUF
Income tax benefits
From a legal perspective, a HUF is an identity separate from its members. The individual members of the Hindu Undivided Family have their PAN cards, and the HUF also has a different PAN card.
A HUF can have its own business from which it generates income. A HUF can also participate in the share market and invest in Mutual funds and shares. Since it is a separate entity, it can enjoy a basic tax exemption amounting to Rs 2.5 lakh.
So, let us suppose that an individual creates a HUF along with his spouse and two children.
The members will enjoy income tax benefits as individuals. Along with this, the HUF will also be able to avail income tax deductions additionally, independent of its members.
Owning a house
According to the current income tax laws, if an individual owns more than one self-occupied property, he is allowed to claim only one of them as his self-occupied property.
The others will be considered as ‘deemed to be let out’, and you are required to pay tax on national rent. But, a HUF can also own residential property without paying taxes for it.
It is also eligible to purchase a house by taking a Home Loan. Section 80C of the Income Tax Act permits a tax deduction of Rs 1.5 lakh in a financial year for loan repayment, to which the HUF is also eligible. The interest on the home loan repayment also attracts a tax deduction of Rs 2 lakh.
Life Insurance
Individuals are allowed to claim tax benefits for certain investments and payments they make during a financial year. In the list of HUF benefits, these are also included.
A Hindu Undivided Family can pay the life insurance premium for its members, and then claim tax benefits for this.
Section 80C permits a maximum deduction of Rs 1.5 lakh for life insurance premiums paid.
Investments
The section 80C also permits HUFs to invest in other tax-saving devices like Equity Linked Savings Scheme and Fixed Deposits and get tax-deductions of up to Rs 1.5 lakh. A Public Provident Fund account cannot be opened in the name of a HUF.
But, the amount the HUF deposits in the PPF accounts of its constituent members is eligible for tax deductions.
Health Insurance
Section 80D permits tax deductions of up to Rs 25,000 for premiums paid on health insurance for an individual, spouse, and dependent children. But, with the rising cost of medical treatments, medical insurance is also becoming more expensive.
So, the tax deduction might prove to be insufficient to cover decent medical insurance. A HUF can prove to be a considerable advantage in this scenario.
A HUF can claim an additional Tax deduction of Rs 25,000 for the health insurance premiums paid for its members. If the health insurance premium is for a senior citizen, then the tax deduction limit is set at Rs 50,000 for the HUF.
Disadvantage of HUF
Though HUF seems like the perfect way to save tax as a family, it comes with its own drawbacks.
Equal rights of members
The greatest disadvantage of opening a HUF is that its members have equal rights on the property.
The common property cannot be sold without the concurrence of all the members. Any additions to the family, by way of birth or marriage, become a member of the HUF and get equal rights.
A HUF can get too large to manage.
Partition
Perhaps the worst nightmare of opening a HUF is closing it down. The only way a HUF can be dissolved is by a partition. All members have to agree to dissolve the HUF.
Under a partition, assets are distributed to members, which can lead to many disputes and can be a lot of legal hassle.
Joint family system losing relevance
HUF was recognised as a separate taxable entity by the income tax department. However, in today’s times, where nuclear families are the norm, HUF is losing relevance.
Several cases have come to fore where couples or families are fighting it out on common household expenses; forget to pool in of assets.
Divorce rates are rising and therefore, HUF as a tax vehicle is losing importance.
HUF continues to be assessed as such till partition
Once a HUF is formed, you must continue to file its tax returns, unless a partition takes place. Any claim for partition is made to the assessing officer.
The assessing officer, on receiving such a claim, must make an inquiry after giving due notice to the members.
Income from the property which was partitioned is taxed as individual income of the member.
If the member forms another HUF with his wife and children, the income of the property which was transferred from the original HUF is taxed in the hands of the new HUF.
Conclusion
There are different tax benefits provided by the government, and you should make use of them. Many people choose to create a HUF for the tax benefits it offers in the long run. The benefits of HUF in income tax are visible, which is why it is so popularly used as a way to save income tax.
DISCLAIMER : The information contained herein is generic in nature and is meant for basic educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product/Examination purpose. Subject to Amendments. Yogesh Suthar is not liable for any decision arising out of the use of this information.
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