It is important to note that the Hindu Undivided Family (HUF) is a legal entity, which has been granted certain exemptions, just as an individual is. Hindus, Sikhs, Buddhists, Jains, or any other religious group can take advantage of these provisions if they are of religious faith. If they can take advantage of these provisions, they should. A member of the HUF is defined as someone who is born into a joint family, thus having an interest in some of the joint family assets.
From now on taxpayers can get a 100% deduction under section 80G for any contribution made to the PM-CARES Fund. This is as per a recent bill passed by Lok Sabha to amend taxation laws. The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Bill 2020 will replace the Taxation and other Laws (Relaxation of Certain Provisions) Ordinance, 2020, promulgated in March.
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:
- 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 transferred by its members.
- 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:
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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 enjoys tax exemption of up to ₹ 2.5 Lakh. So, for members of HUF dual benefit is available once they can claim income tax exemption individually and then additional ₹ 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 194 M 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 ₹ 50 Lakh.
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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 ₹ 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 ₹ 2 Lakh on the interest that would arise from the Home Loan
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Deduction of Life Insurance Premium
The 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 ₹ 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 ₹ 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
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Health Insurance
A maximum of ₹ 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 good health coverage is taken.
However, for individuals who are a member of HUF, they get an extra tax benefit of ₹ 25,000 per year on Health Insurance premium and for individuals who are under the category of senior citizens the limit is up to ₹ 50,000. Where the medical expense is on a physically disabled member the tax benefit available is of ₹ 75,000, for severe disability the amount is ₹ 1,25,000. It is important to note that deduction available to disable members is under Section 80DD of the Income Tax Act, 1961 and is available irrespective of the expenses.
How is HUF Taxed?
- A Hindu Undivided Family (HUF) has its own PAN and files a separate tax return
- It is recognised as a distinct entity from its members, allowing the creation of a separate joint Hindu family business
- The HUF can claim deductions under Section 80 and other exemptions in its income tax return
- It can also take out insurance policies on the lives of its members
- If members contribute to the functioning of the HUF, the HUF can pay them a salary, which can be deducted from its income. Investments can be made from the HUF’s income, with any returns being taxable to the HUF
- The HUF is taxed at the same rates as an individual.
Conclusion
However, the main reason and benefit of a HUF is that the members of the joint family are able to avail an extra PAN card and they can be able to split their income in such a way as to avert paying tax on all of it, which in turn reduces the amount spent on tax.
Frequently Asked Questions
What are the tax advantages of HUF?
The tax advantages of a Hindu Undivided Family (HUF) include the ability to claim deductions and exemptions as a separate entity, thereby reducing the overall tax liability of the family. Additionally, income generated by the HUF is taxed separately from the individual incomes of its members, offering significant tax-saving opportunities.
What deductions can HUF claim?
A HUF can claim various deductions similar to individual taxpayers. These include deductions under Section 80C for investments in instruments like PPF and life insurance, Section 80D for health insurance premiums, and Section 24 for home loan interest. These deductions help lower the taxable income of the HUF.
What is the income tax rate for HUF?
The income tax rate for a HUF is the same as that for individual taxpayers. This means that the HUF is subject to the same tax slabs and rates, which are progressive based on income levels. As such, a HUF benefits from the same exemptions and lower rates applied to lower income brackets.
Is HUF eligible for rebate?
Yes, a HUF is eligible for the same rebate under Section 87A as an individual taxpayer. This rebate is available if the total income of the HUF does not exceed the specified limit set by the government. The rebate helps reduce the tax liability further for eligible HUFs.
How to save tax by forming HUF?
Tax savings by forming a HUF can be achieved by allocating family income and assets under the HUF’s name, thus separating it from individual member incomes. This allows the HUF to claim deductions and exemptions separately, effectively doubling the tax benefits for the family and reducing the overall tax burden.
Can HUF claim 80D deduction?
Yes, a HUF can claim deductions under Section 80D for health insurance premiums paid for its members. This includes premiums for policies covering the HUF’s members, with the deduction limits being the same as those for individual taxpayers, thereby offering significant tax savings on healthcare expenses.
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