HUF Income Tax: Top 5 tax benefits for HUF

Last Updated at: October 23, 2019
1926
HUF Income Tax Top 5 tax benefits for Hindu Undivided Family

Under Section 2(31) of the Income Tax Act, 1961 Hindu Undivided Family (HUF) is treated as a person and is taxed separately from its members. HUF includes all persons that are lineally descended from a common ancestor and will include their wives and their unmarried daughters. Two conditions must be satisfied to be assessed under the head of HUF:

  1. There should be a joint family property which will include their ancestral property or property acquired with the help of the ancestor or with the aid of ancestor or property is transferred by its members.
  2. There should exist a Coparcenership Once a family is assessed as HUF it would continue to be assessed as HUF until and unless there’s a partnership.

Benefits for HUF

As HUF has a separate head for assessment they can claim an exemption under the Tax law separately, for example under Section 80 of the Income Tax Act, 1961. HUF has formed automatically and is not contractual. It is formed by executing a stamp deed, opening a Bank account and a separate PAN number.

Following benefits are enjoyed by a HUF:

  • Exemption under the Income Tax Act, 1961

In the Legal regime, HUF is considered to be a separate legal entity distinct from its members. The members of HUF have their separate PAN card and HUF has its own PAN card and hence HUF can start and run its own business and generate profit. It is important to note that HUF enjoy tax exemption of up to Rs 2.5 Lakh. So, for members of HUF dual benefit is available once they can claim income tax exemption individually and then additional Rs 2.5 lakh exemption yearly under HUF. Further, they can also invest in shares and Mutual funds for long term profit-earning.

In the 2019 Union Budget, liability on HUF to deduct TDS on payment was discussed and a proposal was made to introduce Section 194M in the Act to avoid tax evasion. Under this new section, it is proposed to levy 5% TDS if the payment by a HUF than to contractors of value exceeding Rs 50 Lakh.

Start Your Tax Return

  • Owning more than one House

As per the Income Tax Act, 1971 for the assessee who has more than one self-occupied property, he/she can only claim one of them as his self-occupied property and the rest will be treated as deemed to be let out and the assessee would be required to pay tax on notional rent. On the other hand, a HUF is not required to pay tax and can own a residential house.

Further, a Hindu Undivided Family gets Rs 1.5 lakh tax benefit for loan repayment which they take to purchase a residential property under Section 80C of the Income Tax Act and an additional benefit of up to Rs 2 Lakh on the interest that would arise from the Home Loan

  • Deduction of Life Insurance Premium

Income Tax Act provides a tax benefit to individuals for certain category of payment/transaction that they do. Same is accorded to a HUF, in a case where a HUF pays a premium on the Life Insurance of the members of HUF they can claim benefit as a deduction under Section 80C of the Income Tax Act. A maximum of Rs. 1.5 Lakh can be claimed as a deduction under this section

  •  Investments

To claim the benefit of deduction under Section 80C of the Income Tax Act, 1961 for an amount up to Rs 1.5 Lakh, a HUF can invest in fixed deposit and Equity Linked Savings Scheme. Additionally, it can also claim a tax deduction on the amount that is deposited on individual members PPF account by a HUF

  • Health Insurance 

A maximum of Rs 25,000 can be claimed by an individual as a deduction for the premium paid on health Insurance which is insufficient in cases where a goods health coverage is taken.

However, for individuals who are a member of HUF, they get an extra tax benefit of Rs 25,000 per year on Health Insurance premium and for individuals who are under the category of senior citizens the limit is up to Rs 50,000. Where the medical expense is on a physically disabled member the tax benefit available is of Rs 75,000, for severe disability the amount is Rs. 1,25,000. It is important to note that deduction available to disable member is under Section 80DD of the Income Tax Act, 1961 and is available irrespective of the expenses.

However, the major reason and benefit of a HUF are that the member of the joint family are able to avail an extra PAN card and the members are able to split their income which results into saving on tax and reducing tax expenses.

HUF Income Tax: Top 5 tax benefits for HUF

1926

Under Section 2(31) of the Income Tax Act, 1961 Hindu Undivided Family (HUF) is treated as a person and is taxed separately from its members. HUF includes all persons that are lineally descended from a common ancestor and will include their wives and their unmarried daughters. Two conditions must be satisfied to be assessed under the head of HUF:

  1. There should be a joint family property which will include their ancestral property or property acquired with the help of the ancestor or with the aid of ancestor or property is transferred by its members.
  2. There should exist a Coparcenership Once a family is assessed as HUF it would continue to be assessed as HUF until and unless there’s a partnership.

Benefits for HUF

As HUF has a separate head for assessment they can claim an exemption under the Tax law separately, for example under Section 80 of the Income Tax Act, 1961. HUF has formed automatically and is not contractual. It is formed by executing a stamp deed, opening a Bank account and a separate PAN number.

Following benefits are enjoyed by a HUF:

  • Exemption under the Income Tax Act, 1961

In the Legal regime, HUF is considered to be a separate legal entity distinct from its members. The members of HUF have their separate PAN card and HUF has its own PAN card and hence HUF can start and run its own business and generate profit. It is important to note that HUF enjoy tax exemption of up to Rs 2.5 Lakh. So, for members of HUF dual benefit is available once they can claim income tax exemption individually and then additional Rs 2.5 lakh exemption yearly under HUF. Further, they can also invest in shares and Mutual funds for long term profit-earning.

In the 2019 Union Budget, liability on HUF to deduct TDS on payment was discussed and a proposal was made to introduce Section 194M in the Act to avoid tax evasion. Under this new section, it is proposed to levy 5% TDS if the payment by a HUF than to contractors of value exceeding Rs 50 Lakh.

Start Your Tax Return

  • Owning more than one House

As per the Income Tax Act, 1971 for the assessee who has more than one self-occupied property, he/she can only claim one of them as his self-occupied property and the rest will be treated as deemed to be let out and the assessee would be required to pay tax on notional rent. On the other hand, a HUF is not required to pay tax and can own a residential house.

Further, a Hindu Undivided Family gets Rs 1.5 lakh tax benefit for loan repayment which they take to purchase a residential property under Section 80C of the Income Tax Act and an additional benefit of up to Rs 2 Lakh on the interest that would arise from the Home Loan

  • Deduction of Life Insurance Premium

Income Tax Act provides a tax benefit to individuals for certain category of payment/transaction that they do. Same is accorded to a HUF, in a case where a HUF pays a premium on the Life Insurance of the members of HUF they can claim benefit as a deduction under Section 80C of the Income Tax Act. A maximum of Rs. 1.5 Lakh can be claimed as a deduction under this section

  •  Investments

To claim the benefit of deduction under Section 80C of the Income Tax Act, 1961 for an amount up to Rs 1.5 Lakh, a HUF can invest in fixed deposit and Equity Linked Savings Scheme. Additionally, it can also claim a tax deduction on the amount that is deposited on individual members PPF account by a HUF

  • Health Insurance 

A maximum of Rs 25,000 can be claimed by an individual as a deduction for the premium paid on health Insurance which is insufficient in cases where a goods health coverage is taken.

However, for individuals who are a member of HUF, they get an extra tax benefit of Rs 25,000 per year on Health Insurance premium and for individuals who are under the category of senior citizens the limit is up to Rs 50,000. Where the medical expense is on a physically disabled member the tax benefit available is of Rs 75,000, for severe disability the amount is Rs. 1,25,000. It is important to note that deduction available to disable member is under Section 80DD of the Income Tax Act, 1961 and is available irrespective of the expenses.

However, the major reason and benefit of a HUF are that the member of the joint family are able to avail an extra PAN card and the members are able to split their income which results into saving on tax and reducing tax expenses.

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A lawyer with 14 years' experience, Vikram has worked with several well-known corporate law firms before joining Vakilsearch.