Tax Saving Alternatives

A legal hack to further reduce your taxes

Let's weigh the pros and cons of HUF and see if saving tax through this route is worth it

HUF tax benefits | A legal hack to reduce taxes

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

  • All members have equal rights: All members of the HUF have equal rights on the HUF property. Also, the common property cannot be sold without the consent of all the members.
  • Difficult to manage: A person gets automatically added to the HUF by virtue of birth or marriage in the family. Such a member also shares equal rights with the existing members. Thus, an HUF can become too large to manage over some time.
  • Partition can be a nightmare: Once an HUF is created, it continues to exist until an HUF member demands partition. However, the challenge is that all members must agree to the partition, which can lead to several disputes and legal battles.

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

  • To ensure tax efficiency, caution must be exercised while gifting to an HUF. Any gift worth over Rs 50,000 and received from non-family members is taxable in the hands of an HUF. However, gifts received from an HUF member are tax-free.
  • The HUF can earn income and create additional capital of its own. For instance, it can run a business and invest in shares, mutual funds or real estate. Basically, it can earn income under all the heads, except salary.

Other important points

  • An HUF does not cease to exist upon the demise of its Karta. In such a case, the eldest coparcener becomes the Karta of the family.
  • The Karta's wife and daughter-in-law can only be a member of the HUF and not a coparcener. Do remember that only coparceners can become the Karta of an HUF or demand their partition. However, all members have equal rights on the HUF's property.
  • The HUF can choose the old or new tax regime just like individuals.
  • A married woman can simultaneously be a coparcener in her father's HUF and a member of her husband's HUF.

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


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