Table of Contents
- Benefits & Drawbacks Of Tax Saving By Formation Of Huf.
- What Is A Hindu Undivided Family (huf)?
- How To Make Tax Planning With Huf In India?
- Advantage & Drawbacks Of Forming An Huf
- Conditions For Getting Benefit In Tax Of Forming A Huf.
- What Are The Income Tax Benefits Of Hindu Undivided Family’s?
- Some Challenges In The Huf Structure:
- Disadvantage Of Forming An Huf
Benefits & Drawbacks of Tax saving by Formation of HUF.
What is a Hindu Undivided Family (HUF)?
HUF stands for Hindu Undivided Family. This is a legal practice of reduction of taxes and assets pooling by forming HUF which comes under the Hindu Undivided Family Act. All the members of any Jains, Hindu, Buddhist or Sikh family can create Hindu Undivided Family. HUF has its separate Permanent Account Number (PAN) card and tax returns filing apart from its individual members. This article aims to assist budding entrepreneurs in setting up a HUF.
Many families in India are undivided and the earnings of those families are joint earnings as compared to individual earnings. Hindu Undivided Family is a very effective and completely legalized way recommended by Chartered Accountants in India to save Indian taxes.
In the case of joint incomes, taxation cannot be in the jurisdiction of any specific individual and taxes are in the hands of the whole family. The family has a separate Permanent Account Number (PAN) card because the taxes are in hands of the family, as compared to the solitary members of the Hindu Undivided Family, who are having separate Permanent Account Number (PAN) cards.
How to make Tax Planning with HUF in India?
What is be done in order to form a HUF?
How to form a Hindu Undivided Family? It is good question, It is appropriate Choice in case any person is having a good source of earning & Savings and also have the properties of forefather i.e. treated as family property for HUF. Before taking the decision to form HUF one should have to evaluate all the benefits of taxation and then take a calculated risk for the formation of HUF under the guidance of any financial experts who works professionally in the formation of Hindu Undivided Family.
Who exactly are including in the HUF?
The Hindu Undivided Family involves all the persons who obtain an interest in the properties belonging to their joint family. They also have lineal successors of these persons, and their wives, and children (sons & daughters). Even married daughters can be part of Hindu Undivided Family while being with their her spouse’s family after marriage.
What are the Eligibility in to form a Hindu Undivided Family?
- First of all A family forms a HUF, not an individual.
- HUFs are a special form of legal entity that has its origins in Hindu law. HUF is a group of male lineal descendants of a common ancestor who form a family.
- A Hindu Undivided Family is automatically form at the time of marriage.
- All the lineal ancestor and all of his lineal descendants/ successors, including his wives and unmarried daughters of the common ancestors.
- Their husbands and unmarried daughters would also be included in the family. Because of the structure of the entity, HUF relationships are based on status rather than formal contracts.
- Hindu Undivided Family can be formed by Jains, Hindus, Buddhists & Sikhs.
Advantage & Drawbacks of forming an HUF
Primarily you have to recognize that apart from its members, Hindu Undivided Family also enjoys the basic exemption limit of 250000 and also the deductions mentioned above. This kind of advantage can be utilized by the members of HUF.
The significant beneficiaries of the formation of the HUF Account are that the family can receive an additional PAN card which can diverse family earnings, therefore, resulting in tax reduction and tax saving also.
Conditions for getting benefit in tax of forming a HUF.
- Formation of Hindu Undivided Family is only possible with a family & its members, one person can never form a HUF.
- When a couple gets married, a Hindu Undivided Family is automatically created.
- A common ancestor & all of his lineal descendants, which includes unmarried daughters and wives, who can form a Hindu Undivided Family.
- Hindu Undivided Family’s can be formed by Jains, Hindus, Buddhists and Sikhs.
- The Assets of a Hindu Undivided Family which is received wills, gifts, property acquired from the sale of joint family property, ancestral property, or property contributed to the common pool by Hindu Undivided Family members.
- A Hindu Undivided Family must be properly registered in its name once it has been constituted. A legal agreement is required for a Hindu Undivided Family. The agreement must include information on HUF members as well as the HUF's business. In the name of the Hindu Undivided Family, a Permanent Account Number and a bank account should be established.
What are the Income Tax benefits of Hindu Undivided Family’s?
- It is possible to own a home without paying taxes only possible in the case of HUF. It is also beneficial for tax in loan repayment up to 1,50,000/- Rupees and up to 2,00,000/- Rupees for interest U/s 80C of the Income Tax law.
- With respect to the legal point of view, A Hindu Undivided Family is considered a separate legal entity. Individual members of the family each have their own PAN card, & Hindu Undivided Family has its separate Permanent Account Number (PAN) card as well.
- A Hindu Undivided Family can make money by operating its own business. HUF has the ability to invest in mutual funds & equities. Because it is a separate business, the Hindu Undivided Family also gets a basic tax exemption of 2,50,000/- Rupees.
- A Hindu Undivided Family can invest up to 1,50,000/- Rupees in tax benefits by investing in ELSS (Equity Linked Savings Schemes) and tax-saving Fixed Deposits as per the under Section 80C of income tax Act.
- Even The HUF can claim tax benefits for money invested into the PPF Accounts of its members, despite the fact that it cannot register a Public Provident Fund in its own name.
- No Taxation on gifts up to Rupee 50k. If a son having a lower value Hindu Undivided Family Bank account can get a higher-value property or money by their father with a Hindu Undivided Family Account, but the declaration of gift is for the son's HUF is necessary and not for him personally.
- This is one of the main reasons why Chartered Accountants advice their customers to form a Hindu Undivided Family & Save up to Rs. 1.8 lakhs in taxes each year as above explained in details.
- But It is required to be Noted that, there is a drawback, which is that any assets held in the name of the Hindu Undivided Family belong to the whole family, rather than to a single individual. The HUF Family's assets belong to all members of the family, which including an unborn child in the womb of a mother.
As a result, extreme care should be implemented when gifting assets to the HUF, as the entire family will have a stake in the family's assets, however if the assets were in the name of a single individual, that individual would have the complete ownership of the asset.
Some challenges in the HUF structure:
Disadvantage of forming an HUF
The Hindu Undivided Family was recognized as a separate taxable entity by the Income Tax Dept.. Now a Days, where nuclear families are the standard, the Hindu Undivided Family is losing importance nowadays. Several cases have surfaced in which couples or families are battling about identical house bills while failing to pool their assets. The Hindu Undivided Family as a tax saving tool becomes less essential as divorce rates grow.
- While the Hindu Undivided Family appears to be the ideal option for a family to save money on taxes, it does have some disadvantages.
- The Equal HUF Member rights: the most significant disadvantage of forming a HUF is that all members have equal access to the property. The common property cannot be sold unless all of the members agree. Any new family members, whether by birth or marriage, become members of HUF and have equal rights. A HUF can get too big to handle.
- HUF Partition: HUF Perhaps the most terrifying aspect of starting a HUF is shutting it down. Partition is the only way to dissolve a Hindu Undivided Family. To separate the HUF, all members must agree. Assets are given to members under a division, which can result in numerous disagreements are legal complexity.
- The joint family arrangement is no longer relevant Todays: The income tax department recognised the HUF as a separate taxable entity. Hindu Undivided Family is losing importance in today's world, since nuclear families are the norm. Several situations have come to light in which couples or families are battling over similar home bills while forgetting to pool assets. As divorce rates rise, the Hindu Undivided Family as a tax saving devise becomes less important.
- Hindu Undivided Family is continues as such as till the partition: Once a HUF is formed, you must continue to file its tax returns until the HUF is partitioned. Any partition claim is submitted to the assessing officer. When the assessing officer receives such a claim, he or she must conduct an investigation after notifying the members. The revenue from the partitioned property is taxed as the member's individual income. The revenue from the property transferred from the original HUF is taxed in the hands of the new HUF if the member creates another HUF with his wife and children.
- While the Hindu Undivided Family structure is unquestionably tax reliable, you may encounter certain difficulties.
- To begin with the HUF is founded, all members have equal rights to the HUF's assets. Since acceptance to HUF is by birth, the number of members continues to rise.
- Second, if a HUF is partitioned, the partitioned sum paid out by the HUF during that financial year is recognised as income in the hands of the individual. HUF partitions are becoming complex and involved in legal issues.
- With the increase of nuclear families, the HUF as a concept is progressively losing relevance. But HUF is still a useful tool for reducing your tax bill.
The biggest disadvantage of forming a HUF is that all members have equal ownership rights to the property. The common property cannot be sold without the consent of all members. Any new family members join the HUF and have equal rights, whether through birth or marriage. A HUF could get too enormous to control.
