If you want to minimise liabilities and maximise savings, forming a HUF for your family is the way to go. You can get various benefits of forming an HUF for tax planning, beyond tax exemptions, as they let you and your family properly manage wealth.
Let’s get into the HUF tax planning advantages, how it works, and the best ways to use it for financial planning.
What is a HUF?
A Hindu Undivided Family (HUF) is a legal tax entity which consists of the members of a Hindu family who share common assets and income. It offers various tax benefits that help you and your family get more out of your finances.
Main Features of an HUF:
- It is a separate legal entity which offers you and your family minimal taxation.
- The eldest male, Karta, is in charge of managing the HUF.
- With a HUF, you can own property, receive gifts, and invest in stocks and real estate under its registered name.
- The income of a HUF is taxed separately, excluding the individual family members.
HUF Tax Benefits: Why Should You Form an HUF?
The major reason families acquire a HUF is due to its tax-saving benefits. Below is how the HUF works:
Separate Taxable Entity
A HUF is taxed separately from its members, has its own PAN (Permanent Account Number), and files tax returns independently. The income you earn through HUF’s businesses and investments is not added to its members’ personal income.
HUF Income Tax Slab Benefits
HUFs have basic tax exemption limits of ₹2.5 lakh, which are offered the same as individuals. A HUF also allows your family to split income between individual members, reducing the overall tax liability.
Additional Deductions Under Sections 80C & 80D
Having a HUF can let your family claim a separate ₹1.5 lakh deduction under Section 80C for investments in PPF, LIC, and ELSS. Additionally, the Health insurance premiums paid for HUF members are eligible for deductions under Section 80D.
Tax-Free Gifts and Inheritance
A HUF lets you receive gifts up to ₹50,000 in a financial year without incurring any taxes. Moreover, the inheritance passed down from your ancestors is tax-free.
Lower Tax Liability on Business & Investments
HUFs lets you and your family own businesses and investments, and the income made is taxed separately. In addition, the profits acquired from HUF-owned businesses have the same tax slab benefits as those offered to individuals.
HUF vs Individual Taxation: Which is Better?
The following is the comparison between HUF and Individual taxation. These differences will allow you to make the right decision for maximum tax savings:
| Feature | HUF Taxation | Individual Taxation |
| Tax Filing | HUF files separate tax returns secluding your family members which increases the tax savings | You are required to file personal tax returns based on your financial income |
| Income Tax Slabs | Tax slabs for HUFs are offered the same as individuals but taxed separately | Tax slabs for you as an individual are offered based on your total personal income |
| Deductions | Additional deductions are offered for HUFs under Section 80C, 80D, etc. | The deductions offered for individual taxation apply only to your personal income |
| Income Clubbing | HUF’s income is taxed separately under the HUF name, excluding individual family members | All the income you acquire is taxed under your name |
| Wealth Management | The wealth acquired through the HUF businesses and investments remains within your family unit | You are fully responsible for managing your own wealth acquired from your businesses |
5 Steps to Form an HUF and Start Tax Planning
For you to claim the benefits of forming an HUF, follow the steps below:
Step 1: Create an HUF Deed
Start by drafting an official document that lists the names of Karta and your family members. Ensure you mention the purpose of forming the HUF.
Step 2: Obtain a PAN for the HUF
Apply for a separate PAN card for the HUF entity. This PAN Card is important as it will be required for tax filing and bank account operations.
Step 3: Open a Bank Account in the HUF’s Name
Open a HUF bank account, which is required to manage your family’s income and investments. The Karta, the head of your family, operates the account on behalf of the whole family.
Step 4: Transfer Assets and Investments to the HUF
Your family’s income-generating assets, including rental properties, mutual funds, and fixed deposits, can be transferred to the HUF. The profits and gains from the transferred assets are taxed under the HUF, reducing individual tax burdens.
Step 5: File Tax Returns for the HUF
Your family’s HUF files an Income Tax Return (ITR) separately and ensures compliance with tax laws to maintain its status.
You can visit Dhan to open a HUF Demat Account and get more out of your family’s tax savings.
Potential Challenges of HUF Tax Planning
While HUFs offer several tax benefits to you and your family, you may encounter a few challenges. They include:
- Risk of Legal Disputes During Partition: The partitioning of an HUF can lead to legal disputes if your family members disagree.
- Complex Process for Adding New Members: Adding new members to the HUF after marriage or the birth of children requires proper documentation, hence being complex and time-consuming.
- Scrutiny Due to Misuse of Tax Provisions: Misuse of HUF tax provisions can attract scrutiny from the Income Tax Department.
Cut Taxes, Go HUF
The benefits of forming an HUF for tax planning make it an excellent strategy for you and your family looking to save on taxes while easily managing wealth. Some HUF tax benefits include separate tax slabs, additional deductions, and lower tax liabilities on family assets.
If your family has substantial assets or a business, creating a HUF can lead to major tax savings through HUF taxation.
