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.
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.
Read more: Tax-Saving Investment Options Beyond 80C
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.
Read more: Tips to Avoid Getting a Tax Notice
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.