INTRODUCTION

The Indian Income Tax Act offers various avenues for taxpayers to optimize their tax liabilities in a systematic and lawful manner. One such avenue that often remains underutilized is the creation of a Hindu Undivided Family (HUF). A HUF can be formed by a married couple or members of a joint family, and it can also be formed by Jains, Sikhs, and Buddhists despite being governed by the Hindu law board.

A HUF is treated as a separate entity for income tax purposes and is taxed separately, enabling individuals to segregate their tax obligations from those of their family members. The income tax slab for HUF is the same as that for an individual, with an exemption limit of Rs 2.5 lakh, and it qualifies for all the tax benefits under sections 80C, 80D, 80G, and more under the Income Tax Act 1961. Additionally, HUFs enjoy exemptions under Sections 54 and 54F concerning capital gains. Creating a HUF involves fulfilling certain legal and financial requirements. To establish a HUF, a deed must be executed, a HUF PAN should be obtained, and a bank account in the name of the HUF must be opened. The process incurs a modest cost. Capital must be infused to create the HUF corpus, which can be achieved through gifts from relatives or assets received through wills or inheritance, as such contributions enjoy tax exemption. However, it is essential to avoid transferring personal assets and funds to the HUF account to prevent the income generated from being clubbed with personal income under Section 64(2).

Read more: How to File Income Tax Returns Online

The Karta( a person who usually manage all the affair of the family), or the senior most male member of the family, manages the HUF corpus. All family members can contribute their income to this common pool, which the Karta handles or authorizes for handling. Transactions from the HUF account require Karta's signature. While the HUF account shares similarities with an individual savings account, it offers various tax benefits on income pooled from family members.

SOME DISTINCTIVE FEATURES OF THE HUF ACCOUNT INCLUDE

• Each family member can deposit their income in the common corpus.
• The Karta has sole authority over HUF account activities, even though all family members participate.
• Tax benefits are available on deposits under various sections.
• The corpus can only be divided with the agreement of every coparcener of the family.

Opening a HUF account requires specific documents, including a unique PAN card for the HUF, along with the PAN of the Karta. A declaration form is provided, which each member must sign to affirm that they are the only members of the HUF, and the Karta has sole authority over the HUF account. Additional requirements may vary depending on the bank where the HUF account is opened.

HUFS OFFER SEVERAL TAX BENEFITS

• Tax rebates and deductions can be availed under Section 80C for HUF accounts.
• Gifts up to Rs 50,000 collected by the HUF are tax-free.
• The corpus can be invested in tax-free financial instruments.

Read more: Tax-Saving Investment Options Beyond 80C

However, there are some disadvantages to consider:

• Insecurity among members may lead to an empty HUF corpus, rendering the account non-functional.
• Partitioning the HUF deposit can be a tedious process if any member wishes to proceed with it.

Despite its limitations, HUFs offer valuable tax-saving opportunities. For salaried individuals, while salary income cannot be diverted to the HUF, additional income earned through other sources can be claimed in the name of the HUF, thus reducing taxable income.

Here are some effective ways to optimize tax savings with a HUF:

• Rental Income from Property: Receive rental income from property on behalf of the HUF rather than an individual account.
• Business Income: Generate profits from the family business under the name of the HUF to benefit from tax exemptions and deductions.
• Remuneration to Karta and Members: Provide remuneration to Karta and other family members, as it qualifies as an allowable deduction from HUF income.
• Loan to HUF Members: If the HUF's business, capital, or investments are expanding, consider providing loans to individual members, either with or without interest.
• Family Settlement or Arrangement: Employ a family settlement to resolve property disputes among family members, thereby reducing tax incidence or potentially eliminating it.

While utilizing HUFs for tax optimization, it is crucial to adhere to certain guidelines:

• File the HUF's income tax return annually, considering all income received under its name, but be aware of the clubbing provision that may hold the Karta liable for any income diverted to the HUF with the intention of evading tax.
• Assets contributed to the HUF are considered common assets, and the previous owner must renounce ownership in favor of the HUF.
• New additions to the family through birth or marriage will add members to the HUF, which may complicate its management and record-keeping.
• The process of shutting down the HUF can be challenging and requires the unanimous agreement of all HUF members.

Read more: Tips to Avoid Getting a Tax Notice

CONCLUSION

Forming a HUF is a legitimate way to optimize tax savings and include family members in the process. By leveraging the tax benefits offered under the Income Tax Act, individuals can strategically manage their income and investments through HUF accounts, leading to reduced tax liabilities and increased financial security for the family. However, it is essential to understand the legal and financial implications associated with HUFs and to seek professional advice when needed to maximize the benefits while adhering to the relevant tax laws.

We at TaxNodes can help ensure a smooth and hassle-free experience while filing ITR.

byAstik Dubey

Astik is a law student diving deep into indirect Tax and business law. With a flair for business writing and a special interest in crypto taxation, he turns complexity into captivating articles. Join his enlightening blog, where law and business intersect.

•