Hindu Undivided Family

Hindu Undivided Family

Highlights

  • Understand the Meaning of Hindu Undivided Family (HUF).
  • Check how you can save taxes if you pay tax after forming a HUF.
  • See the Tax Rules applicable to HUF and how it is created.

HUF stands for Hindu Undivided Family in which all the family members with a Hindu Culture can come together and remove some tax burden by forming a HUF. On the other hand, Buddhists, Jains, and Sikhs can also build a HUF and claim for the tax benefits. HUF has its own PAN on the basis of which it files income tax returns independently. There are many other benefits of Hindu Undivided Family and there are some families in India that are not divided and all the members accumulate the income and it is considered as a joint income. The main advantage of the Hindu Undivided Family is that the taxes are not levied on a specific person but as a whole on all family members. So, collective taxes imposed on all the members of HUF can be tax-saving.

How to Save Taxes by Creating HUF

You will need a PAN Card for HUF that will be used to file an income tax return. All the members of HUF will not have to pay taxes on an individual basis but as a whole. The tax will be charged on the HUF and the HUF PAN card will be legally accepted once the HUF is created.

You can see in the example given below how you can save taxes by creating a HUF and pay more taxes if you don’t create a HUF.

  
Mr.RamadhirMrs.Ramadhir
Annual Income-₹21,00,000Annual Income-₹18,00,000
Combine Income from an Ancestral Land- ₹7,00,000#colspan

As you can see that Mr. Ramadhir and Mrs. Ramadhir Falls under the income tax Slab of 30% so they will have to pay taxes according to it.

  • If Mr. Ramadhir bares the taxes on the income from ancestral property.
    • 30% of 7,00,000 = 2,10,000
  • If Mrs. Ramadhir bares the taxes on the income from ancestral property.
    • 30% of 7,00,000 = 2,10,000
  • If the Taxes are paid by Mr. and Mrs. Ramadhir equally:-
    • Mr. Ramadhir = 1,05,000
    • Mrs. Ramadhir = 1,05,000
  • If in case you pay taxes being a HUF then you can enjoy additional tax benefits on the rent of land. For HUF the amount for the ancestral rents will be reduced to 60,000 to 70,000. So your total savings after forming a HUF will be”
    • Tax Savings = 2,10,000 – 60,000 = 1,50,000
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Therefore, by forming a HUF, you can reduce your tax burden and enjoy additional tax rebates.

Tax Rules of a Hindu Undivided Family

  • Hindu Undivided Family has its own PAN.
  • It files a separate income tax return. 
  • A separate HUF business is created since it has an entity separate from its members.
  • HUF can claim for Deductions under section 80 and other exemptions in its income tax return.
  • HUF can take a Life insurance policy for its members.
  • The HUF can pay salaries to its members if they contribute to the functioning of the HUF. 
  • The HUF can deduct the Salary Expenses from the income of HUF.
  • HUF is allowed to make investments as well. 
  • Any returns from the investments are taxable for HUF.
  • The tax rates are the same for HUF and individuals.

How Hindu Undivided Family is Created

  • HUF is formed by a family and not by one person.
  • At the time of marriage, a HUF is automatically created.
  • HUF consists 
    • Common ancestor and all of his lineal descendants
    • Including their wives and unmarried daughters.
  • Hindus, Buddhists, Jains, and Sikhs can form HUFs.
  • HUF usually has assets that come as a gift, a will, or ancestral property, or property acquired from the sale of joint family property or property contributed to the common pool by members of HUF.
  • After the Formation of HUF, it must be formally registered in its name. 
  • A HUF should have a legal deed. 
  • The deed shall contain details of HUF members and the business of the HUF. 
  • The HUF should have a PAN number and a bank account should be opened in its name.
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