Forming a Hindu Undivided Family (HUF) could be a great tax saving move for you. There are a number of provisions that the India taxation system provides for the HUFs. At the same time, there are some limitations due to which many people do not want to go for HUFs.
So, let’s talk about the various pros and cons of having an HUF.
What is an HUF?
An HUF, as the term suggests, is a group of members from the same family. An HUF can be formed by common parents, their sons and their spouses, and their unmarried daughters.
Only the people belonging to Hinduism, Jainism, Buddhism and Sikhism religions can form up an HUF.
What are the main features of HUF
Under an HUF, all the members get equal proportion of the assets owned by the family. For instance, if there is home worth Rs 1 crore and there are 5 members in the HUF, each one of them has a right to get Rs 20 lakh if this property is sold off. Members who are added to the family by way of birth or marriage automatically become a part of the HUF.
An HUF cannot sell any property under its fold, unless all the members of the HUF give their consent.
It is due to these reasons many times people do not want to go for HUFs.
What kinds of tax deductions are available to HUFs?
While all the members of an HUF are eligible to claim the general income tax deductions available under Section 80C of the Income Tax Act, they can also save tax by way of claiming deductions through their HUF entity. Thus, in total, the income tax outflow becomes lesser for the HUF members.
HUFs are also entitled for several other exemptions and deductions. An HUF is entitled for exemption on long term capital gains on listed securities and dividend income. Similarly, the HUF is also entitled for lower tax rates as compared to individual tax liability and other entities.
An HUF, for instance, is liable to pay a lower tax rate of only 15% tax on short term capital gains. If an HUF member gives any gift to the whole HUF, it is not subjected to income tax under section 64 of the Income Tax Act. Similarly, an HUF can also receive loan from a member and claim tax exemptions.
If the HUF receives a gift from non-member, it can claim tax exemptions up to Rs 50,000 a year.
How to form an HUF?
An HUF can be formed just like any other entity and you can apply for it with the help of a legal and tax professional. Another simple process of forming an HUF is to get a capital gift from your father or mother or in-laws directly in the name of the family.
After receiving a gift, the HUF members can apply for opening a bank account in the name of the HUF itself. An HUF becomes a pure legal entity and can also become a partner in a partnership firm. An HUF can also apply for a Permanent Account Number (PAN) via form no. 49A.
As you can see forming an HUF has both pros and cons and it is up to the members of a family how willing they are to go with the provisions of the HUF.