Let's weigh the pros and cons of HUF and see if saving tax through this route is worth it
26-May-2023 •Shruti Agarwal
Whether you fall in the 5 per cent tax bracket or the dreaded 30 per cent category, there's one common yearning that unites us all - our insatiable thirst for income-tax deductions and exemptions. Which is why we anxiously glue ourselves to the TV screen on budget day, praying for some tax relief.
But what if we tell you you can immediately double your tax benefits?
No, we are neither joking nor making any flashy clickbait promises. The key lies in embracing a perfectly legal tax-saving manoeuvre known as 'HUF'.
However, like any financial decision, it has its fair share of pros and cons. So, let's understand if you should set up an HUF to save tax.
What is HUF
An HUF is a family that comprises all the persons lineally descended from a common ancestor, including wives.
As per the Indian tax laws, an HUF is recognised as a distinct entity. It is subject to tax like an individual taxpayer, and you have to file its tax return separately.
An HUF is recognised across India, except Kerala.
Benefits of creating an HUF
You get the benefits of two PAN cards, meaning you can shift some of your income to the HUF account. This way, you get to reduce your tax.
An HUF also enjoys income tax benefits, Section 80C deductions and other exemptions, including long-term capital gains.
Let's provide an example, so you understand how having two separate PAN cards (tax accounts) can considerably reduce your tax liability.
Disadvantages of HUF
Now that you know the merits and demerits, let's look at the more practical points of HUF.
Who can set up an HUF
An HUF can only be created by Hindu, Buddhist, Jain or Sikh families.
The head of the HUF is called Karta, and the other members are called coparceners.
The Karta is in charge of running the HUF and can sign the documents on behalf of other members. However, they may also permit other adult members to have this power. The decisions of the Karta apply to all members.
Although an HUF can be created with a minimum of two family members (one being its Karta), the consensus is that there should be at least two coparceners in an entity to be taxed as an HUF.
How to set up HUF
You need to apply for the HUF's PAN and open a bank account in its name. You should also create a legal deed. This document contains details such as the name of the Karta and other members of the HUF.
For the initial capital, an HUF usually receives assets in the form of ancestral property, a gift or under a will.
Things to remember
Other important points
The last word
The decision to create an HUF depends from family to family. People running family businesses or those bestowed with large family assets can find it helpful in pooling in income or for estate planning. For others, it may not be worthwhile, given the potential hassles discussed above.
If you opt to establish one, plan carefully while transferring assets, as all members will be entitled to an equal share in the shared property.
Suggested read: Six popular tax-saving investments in India