Unlocking tax savings: How HUFs can help families optimise their finances?

The HUF can choose the old or new tax regime just like individuals

Indian families are increasingly discovering the financial advantages of Hindu Undivided Family (HUF), a legal entity that offers significant tax benefits under the Income Tax Act.

 

What is Hindu Undivided Family (HUF)?

 

A Hindu family can come together to establish an HUF, and this option is also available to Buddhists, Jains, and Sikhs too. You can reduce your tax liability by creating a family unit and pooling assets. The HUF is taxed independently of its members, and it has its own PAN and files its tax returns separately from its members.

 

“For instance, if you are in a 30 per cent tax bracket, you typically pay 30 per cent on the interest earned. However, with the strategic structuring of HUF's income, you could potentially end up paying only 0 per cent or, at most, 10 per cent, depending on the applicable tax slabs for the HUF. This significant reduction in tax liability is a key advantage of HUFs,” said Anand K Rathi, co-founder of MIRA Money.

 

Who does HUF benefit?

 

Salaried individuals who wish to create an HUF to generate additional business income.

 

The HUF that inherits property through a will, as the income from such property will be considered the HUF’s income.

 

How does HUF work?

 

An HUF consists of a Karta, coparceners, and other members. The Karta holds the authority to manage transactions and sign cheques on behalf of the HUF. Coparceners are individuals born into the undivided family, such as a father and son or daughter. On the other hand, members are those who join the family through marriage, like the mother and wife.

 

“HUFs function as a distinct tax-saving entity or a separate tax entity within your family. Moreover, if your HUF earns more than Rs 1,25,000 or has a long-term capital gain of Rs 1,25,000 or more, that income can also be considered tax-free in the HUF’s hands. This unique feature of HUFs allows you to effectively create a tax-saving entity within your family,” said Anand.

 

The HUF can purchase life insurance policies for its members and claim a deduction under Section 80C of the Income Tax Act on the premium paid, as it holds its own PAN and files tax returns independently. The HUF can also choose the old or new tax regime just like individuals.

 

To form an HUF, families need to:

 

Create a HUF deed stating members and their relationships.

 

Obtain a PAN card for the HUF.

 

Open a separate bank account.

 

Maintain proper books of accounts.

 

File annual tax returns.

 

What are potential conflicts HUF may face?

 

Conflicts can arise among members of the HUF, especially concerning the selection of the Karta (head of the HUF) or the division of assets, leading to discord within the family. Resolving these disputes may necessitate mediation, legal intervention, or efforts to build a family consensus.