HUF: Working Secret for Families to Save Tax

What is a HUF?

The Hindu Undivided Family consists of all persons lineally descended from a common ancestor, including their wives and unmarried daughters. It is considered a separate taxpayer under the Income Tax Act. After formation, the HUF gets its PAN card and files an Income Tax Return separate from the individual returns of the family members.

How Does HUF Save Tax?

The biggest advantage is that the HUF is treated as a separate legal entity. Thus, the families can split income and claim the benefits of taxation separately. Here's how it helps: 

• Additional Basic Exemption Limit: Like an individual, the HUF enjoys a basic exemption limit of ? 2.5 lakhs annually.
• Deductions under Section 80C: Investments for example, LIC premium, ELSS, and PPF made through the HUF account are eligible for claiming deductions.
• Income from Property: Rental income from a property of the family can be parked in the name of the HUF, thereby diminishing the taxable income of the individual.
• Business Income: Profits of the family business when run under HUF are subject to tax separately.
• Wealth Transfer: Gifts received by the HUF from its members are exempt from tax subject to limits. 

Steps to Come into Existence an HUF-

• Create a deed subscribing to the formation of the HUF.
• Apply for PAN in the name of the HUF.
• Open a bank account in the name of HUF.
• Start transferring income-generating assets or investments into the HUF account.

Some Important Things to Remember- 

• HUF can be formed only by Hindu, Jain, Sikh, and Buddhist families.
• The eldest male member (Karta) manages the HUF, but since the code amendment of 2005 even a female could become Karta.
• Income arising out from salaries cannot be diverted to an HUF: It is mainly income from business, property, or investments.
• Any kind of misuse will invite asking questions of the department.

Conclusion-

In essence, the HUF is a legal method for the family to save taxes and build wealth collectively. In forming an HUF, the family gets an additional exemption, extra deductions, and investment channels for income accumulation. Erroneous formation can jeopardize the whole structure; hence professional guidance is in utmost need for compliance and maximum benefits.

If you look forward to some neat tax-saving ideas, an HUF would just be your family’s secret weapon against high taxation.