The concept of Hindu Undivided Family, commonly known as HUF, was derived from the ancient hindu laws. An HUF can be formed with the oldest male member and his wife and children and their spouses. HUF is treated as a separate entity all together, and enjoys the same tax benefits as any other individual taxpayer. As the name states, ‘Hindu Undivided Family’, one may think, this is only applicable in the case of hindus, but this is not so, Jains, Sikhs and Buddhists are also included under HUF.
There are 2 types of laws governing the HUFs in India, one is Mitakshara and the second one is Dayabhaga. The rights and obligations of these laws are very different from each other. Dayabhaga is mainly concerned with Bengal, while Mitakshara is concerened with the rest of India.
The oldest male member heads the HUF, and is called the ‘Karta’. He is responsible for making and taking decisions for the HUF. The other members in the family are called co-parcerners. In an HUF all the members can contribute, but once the contribution is made, it will be treated as an asset of the HUF and not of that individual. Earlier only the male members were allowed to be a part of the HUF and had rights to the ancestral property. Now, even women born in a HUf, have equal rights. If the sole male member dies, the joint family will still be continued in the hands of the women in the family.
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A HUF is automatically formed, once a person is married, but some legal formalities need to be done, like executing a deed on stamp duty paper, declaring the formation of HUF, making a separate PAN card and opening a bank account in the HUF’s name. One family can have many HUFs, if the children get married, with the male member being the karta. However, once an unmarried daughter in a HUF, gets married, she’s no more part of the HUF, infact she joins her husband’s HUF.
Apart from salary income, any other income can be transferred to the HUF account, to avail the tax benefits under section 80C. The tax slabs are the same for an HUF as that of an individual. There are many ways in which a person can save tax, through HUF:
Let us now look at the different ways to save tax:
- Married couples can benefit most from the HUF. They can take health and life insurance policies for themselves, in the HUF’s name and invest to get maximum benefit upto Rs.150,000/-.
- A family business can also be operated from the HUF account and the income received from the same will be taxed in the name of the HUF.
- If either the husband or wife happen to be holding an ancestral property which accrues rental income, they can transfer this income to the HUF account and it will be taxed as the income of HUF. For example, a person earning a salary of Rs.700,000/- p.a. and receiving Rs.600,000/- p.a. as rental income from their ancestral house, and if he transfers the rental income amount to the HUF account, instead of adding it to his income, he will have to pay only Rs.115,000 as tax. But if he clubs the rental income to his salary, he would have to pay Rs.215,000/-.
- Another advantage of creating an HUF of that gifts of upto Rs. 50,000/- p.a. are exempt. However, HUF can also receive gifts worth Rs. 2.5 Lakhs under basic exemptions and Rs. 1.5 Lakhs as the maximum deduction
- HUF is also a very great tool for Tax planning and Insurance planning. Any policy can be taken in the name of any member of HUF or Karta and HUF can pay the premium and get benefit u/s 80C. For Ex. If a person takes an Insurance policy and paying a premium of Rs. 3 lacs. He can take two separate policies and pay premium, one as an individual and one from the HUF account. He will get the entire 3 lacs deduction u/s 80C i.e. 1.5 lacs as an Individual and 1.5 lacs in the HUF account.
Having said the above, one should be very careful and plan their transactions properly to the HUF account. If you are not sure or not familiar of how to go about, it is advisable to take a consultant’s advice.
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