What is logic behind Forming a Hindu Undivided Family to Save Tax ?
- The main reasons for joining the Hindu Undivided Family to save money on taxes is to lawfully obtain an extra Permeant Account Number (PAN) card.
Because the Family’s income is not taxable in the hands of any single individual, the Hindu Undivided Family is given a new Permeant Account Number (PAN) card, which is used to pay taxes. - Because a new Permanent Account Number (PAN) Card will be issued to the entire family, it will also benefit on Income Tax Slab Rates, which means that income will be tax-free up to certain limitations before being taxed increasing at 10%, 20%, and 30%, Which may resulting in tax savings under income tax.
- An example will demonstrate how establishing a Hindu Undivided Family Account might result in tax savings. Assume a family of four consists of a husband, wife, and two children.
- The wife’s income is 18 lakhs rupees while the husband’s income is 25 lakh rupees. They also have an ancestral property from which they earn 8 lakh rupees form year rent.
How to create and HUF ?
Rental Income from such a property would be taxed in either the husband’s or wife’s hands, or both.
Case-1: If taxed in the husband’s hands, the husband, who is currently in the 30% Income Tax Slab Category, would be forced to pay 30% of 8 lakhs, or 2.4 lakhs in tax.
Case-2: If taxed in the hands of the wife, the woman, who is currently in the 30% Income Tax Slab, would be obliged to pay 30% of 8 lakhs, or 2.4 lakhs, in taxes.
Case-3: If both Husband and Wife were taxed equally, i.e. 4 lakhs each, both Husband and Wife would be obliged to pay tax at 30% on 4 lakh = 1.2 lakhs each, resulting in a total tax outlay of 2.4 lakhs.
- But, there is a more effective way to plan your income tax. This income is derived from an assets that belongs to entire family, this income shall be taxed in the hands of the family (if a HUF is constituted) and you will be eligible for the Income tax slab rate.
Case-4: If this 8 lakhs in income from rental is taxable in the hands of a Hindu Undivided Family, the tax due by the Hindu Undivided Family based on the Slab Rates would be between 70,000 and 80,000 depending on the income tax discounting claimed by the Hindu Undivided Family.
Taxation on Rental Income in the hands of the Hindu Undivided Family would save 1,80,000 per year (2,40,000 – 60,000 rupees).
In simple words Rental Income, but there are many other incomes that accrue to the family as a whole, and the concept of saving taxes by forming a Hindu Undivided Family can be applied to them as well.
Other Relevant Points regarding Hindu Undivided Family
- Hindu Undivided Family’s like individuals, are required to submit an Income Tax Return every year, and if the HUF’s business revenue exceeds INR 25 lakhs / INR 1 Cr, a Tax Audit U/s 44AB is always required to be done by a Chartered Accountants in India.
- The Timeline date for filing the Hindu Undivided Family’s Income Tax Return is July 31st of the AY. In the event that a tax audit is required, the due date for filing the return is September 30th.
- Hindu Undivided Family’s Karta has the authority to sign all documents on the Hindu Undivided Family’s behalf. He may, however, grant this authority to other adult members.
- Although an adopted child can join the Hindu Undivided Family, he cannot become a co-parcener. The only distinction between a member and a co-parcener is that a member cannot request that the Hindu Undivided Family be partitioned.
- Hindu Undivided Family’s are recognised across India, with the exception of Kerala, where they are not. Kerala Joint Family System (Abolition) Act, 1975 abolished the Kerala Joint Family System on December 1, 1976.
- Depending on where the Hindu Undivided Family’s control is located in India, the Hindu Undivided Family may be a resident or non-resident.
How is Hindu Undivided Family taxed under Income Tax ?
- Hindu Undivided Families have their own Permanent account number & file their own income tax Returns. Because it has a different entity from its members, a joint Hindu family business is formed.
- The Hindu Undivided Family can claim deductions U/s 80 and other exemptions on its income tax return.
- A Hindu Undivided Family can get a life insurance coverage for its members.
- If members contribute to the HUF’s its functioning/operation, the HUF can pay them salary. This salary Expenses can be deducted from Hindu Undivided Family’s Income.
- HUF Income can be used to make investments. In the hands of the Hindu Undivided Family’s all profits from these investments are taxable.
- A Hindu Undivided Family’s pays the same tax rate as an individual person.
Tax Deductions available to Hindu Undivided Family’s ?
Hindu Undivided Family’s is a separate legal entity, it is entitled to the same basic exemption limit of 2.50 Lakhs Rupees & Deductions from an individual. The below are some of the section 80 deductions available to Hindu Undivided Family’s:
| Section | Income Deduction | Allowable Deduction |
Under Section 80C | LIC | Payment of Life Insurance Premium policy of any of Hindu Undivided Family members. |
| Payment under a contract for a deferred annuity | Paid for the deferred annuity Policy of any of Hindu Undivided Family Members. |
| PPF | Any contribution made towards Public Provident Fund account of Hindu Undivided Family Members. |
| Life Insurance Premium, Mutual Fund, Unit Linked Insurance Plan of UTI | Any contribution made in the name of any of Hindu Undivided Family members. |
| Tuition fees Payment | Paid for children of any of Hindu Undivided Family Members. |
| Certain payments for Repayment of Housing Loan or construction/ purchase of residential House Property, | Paid for the House Property constructed or purchased by Hindu Undivided Family & expenses are exclusively or wholly for the property purchase. |
| Equity Linked Saving Scheme Subscription | Paid for the Equity Linked Saving Scheme Subscription which is either in the name of the Hindu Undivided Family or any of the members of the Hindu Undivided Family. |
| Term deposit for a fixed period of not less than Five years, with Post Office or a scheduled bank. | Payment for the Term deposit for a fixed period in the name of Hindu Undivided Family or any of HUF’s Members |
Under Section 80D | Preventive health check-up or Health Insurance Premium | Payment for any of the members of the Hindu Undivided Family. |
Under Section 80TTA | Interest on deposits in Savings Bank A/c | Interest is income on Savings Bank A/c the HUF Name. |
Under Section 80DDB | Expenses paid for medical treatment of specified diseases and ailments | Payment towards for the treatment of any of the members of the Hindu Undivided Family who are completely dependent on the family |
Under Section 80DD | Any Expenditure on medical treatment of a person with a disability | Payment towards Expenditure on medical treatment Paid for any of the members (with a disability) of the Hindu Undivided Family |
- In case HUF has a carrying any business, then business expenditures can be claimed while computing the tax on Hindu Undivided Family income.
- If the Karta & members of the HUF are operating for the Hindu Undivided Family business, whatever compensation they get can be deducted from the Hindu Undivided Family business income.
FAQ’s on Hindu Undivided Family
Q.1: Can a Woman be Hindu Undivided Family Karta?
Yes! A woman could not be the HUF Karta until January 2016. But The Delhi High Court, decided in favors of a female becoming the Karta of a HUF in a landmark decision. But it has yet to be integrated into the Income Tax Act till date.
Q.2: Who is the Karta of a Hindu Undivided Family?
A HUF’s head is known as the Karta of the family, & he is the family’s senior male member.
Q.3: Who are Hindu Undivided Family Coparceners?
- All members of the Karta family are eligible to join the Hindu Undivided Family. The male members are known as ‘coparceners’, while the female members are simply known as ‘members. The distinction is that any of the coparceners can demand that the Hindu Undivided Family be divided/partition.
- In most regions of the country, female members do not have this right, with the exception of Maharashtra and Tamil Nadu, which allow unmarried daughters to serve as coparceners. The Hindu Succession (Amendment) Act, 2005, which took effect on September 9, 2005, ended gender discrimination by providing daughters the same rights as sons.
- Daughters, like sons, become coparceners of their father’s families upon birth & Daughters have the same rights to the family properties as sons.
Q.4:: Can a daughter claim a share in her father’s property where her father had passed away before the amendment made in 2005, giving equal rights to daughters & Sons?
No, both the daughter and the father must be alive on the date of the amendment in order for the daughter to get the benefit, regardless of whether she is married or not. If the father died before the amendment date, she would not have been considered a daughter at the time of the amendment. As a result, she is unable to claim any of her father’s assets.
Q.5:: Are there any Incomes that not taxed as income of Hindu Undivided Family?
Below Hindu Undivided Family incomes are exempted from the income tax Act.
- In case a member transfers his property(self-acquired) to Hindu Undivided Family without receiving adequate selling consideration.
Then the Concern property income of Hindu Undivided Family’s is not taxable under the income e tax Act. It will continue to be taxed in the member’s hands. - Members personal income cannot be considered Hindu Undivided Family Income. Because “Stridhan” is a woman’s absolute property, the income from it is not taxable as Hindu Undivided Family income.
- Income from a daughter’s individual property is not taxable in the hands of the Hindu Undivided Family, even if the daughter has vested the property in the HUF.
Q.6:: Are there any minimum No of coparceners needed for an entity to be taxed as Hindu Undivided Family?
- A Hindu Undivided Family can consist of only 2 members, one of whom is a coparcener. However, in order to be taxed as a HUF, an entity must have at least two coparceners. If a HUF simply consists of the husband and wife,
- For example, there is only one coparcener. So, unless the funds are received on the split of a larger HUF, it will not be taxed in the hands of the HUF. In the hands of a single coparcener, it will be taxed.
Q.6: Should a Hindu Undivided Family always be a resident of India?
- A Hindu Undivided Family does not have to be an Indian resident all of the time. The HUF would be considered as a non-resident, in case its control & administration were located outside of India.
- The Hindu Undivided Family would be considered a non-resident if its affairs were administered from outside India.
Q.7:: In case Karta of Hindu Undivided Family sits outside India. HUF is managed by the other members residing in India. Will Hindu Undivided Family be a non-resident?
- The residential status of a HUF is decided not by the Karta’s residence, but by the place from which the Hindu Undivided Family is managed. The Hindu Undivided Family will be classified as a non-resident if its control & administration are located outside of India.
- Even though the Karta is based outside of India, the HUF is managed by Indian members, constituting the Hindu Undivided Family an Indian
Q.8: Can the members of the HUF and the HUF separately claim deduction under Section 80C?
- The Hindu Undivided Family can claim a deduction U/s 80C because it is a separate taxable assesses under the income tax Act. But The Member & HUF, on the other hand, cannot claim a deduction for the same investment or expense.
Q.9:: Upon the demise of the Karta, who takes over the title ‘Karta’?
- When Karta passes away, the family’s eldest male member will be consider & becomes the family’s Karta.
- Even if the deceased Karta’s wife is still living, Position will be taken up by the eldest son or any other eldest male member of the family.
Q.10:: What happens if the eldest male member of the family is an NRI?
- A Hindu Undivided Family is deemed an Indian resident, if it controls and manages its affairs entirely or partially in India.
- In rare circumstances, the family’s Karta may be non-resident. The family’s resident status will not shift to non-resident simply because the Karta is a non-resident until the family’s decisions to be taken outside of India.
Conclusions
- Due to independent taxation on Hindu Undivided Family from their individual members, which is also eligible for deductions (Under Section 80 of Income tax Act) and exemptions under the tax modulation. A Hindu Undivided Family has both pros and cons so you must make a strong decision and make sure Hindu Undivided Family is balanced well before creating a HUF.
- Although it appears that joining a Hindu Undivided Family is a great method to save money on taxes, it does have certain disadvantages. Hindu Undivided Family trades should be carefully considered and arranged. You might also seek help or assistance from a Chartered Accountants or a tax specialist to ensure that no tax rules have been broken.