What is Hindu Undivided Family?
A Hindu Undivided Family (HUF) is a legal entity in India that offers several tax benefits and financial advantages. By understanding its intricacies and strategic implementation, families can optimize their tax planning and wealth management.
Key Benefits of HUF
- Additional Tax Exemptions:
- Long-Term Capital Gains: HUFs enjoy an additional exemption of Rs. 1,25,000 on long-term capital gains, reducing the overall tax liability.
- Short-Term Capital Gains: HUFs benefit from an additional basic exemption of Rs. 2,50,000 on short-term capital gains.
- Separate Business Entity:
- HUFs can operate as separate business entities, allowing for better management of income and expenses, Hindu undivided family business
- Separate limit for Section 44AD/44ADA presumptive taxation limit
- Clubbing Provisions
- Clubbing provisions applicable on Spouse however not on HUF.
How HUF Can Benefit Your Family: Hindu undivided Examples
HUF Tax Benefit:
Consider this example of Mr.Ram Sharma
- Without HUF: tax to Mr.Ram
- Long-term capital gain: Rs. 3,00,000
- Salary Income: 6,00,000
- Short term Capital gain: 2,50,000
- Taxable Income:
Salary: 600,000
Short-term Capital Gain: 2,50,000
Long-term Capital Gain: Rs. 1,75,000 (3,00,000 – 1,25,000)
- Tax payable:
On Salary: Nil after Rebate
On Long-term capital gain: Rs. 22,750 (1,75,000 * 12.5% + 4% cess)
On Short-term capital gain Rs.52000( 2,50,000*20%+ 4% cess)
- With HUF: Mr Ram Sharma & Ram Sharma( HUF )
- Long-term capital gain: Rs. 3,00,000
Rs. 1,25,000 allocated to HUF (tax-free)
Taxable income: Rs. 50,000 (1,75,000 – 1,25,000)
Tax payable: Rs. 6,500 (50,000 * 12.5% + 4% cess)
Short term Capital Gain: nil( 2,50,000-2,50,000)
- Tax Saving: 68,250
Higher the Income, Higher the tax saving
Clubbing Provision Rules:
Mr. Ram Sharma and Mrs.Geeta Sharma are a married couple. Mr. Ram Sharma is a working professional earning a salary of Rs. 15,00,000 annually. Mrs.Geeta Sharma is a homemaker.
Mr. Ram Sharma, with the intention of reducing his tax liability, transfers a fixed deposit worth Rs. 10,00,000 to his wife’s name. The fixed deposit generates an annual interest of Rs. 50,000.
In this case, even though the fixed deposit is in Mrs. Geeta Sharma’s name, the income generated from it will be clubbed with Mr. Ram Sharma’s income and taxed accordingly. This is because the transfer was made without adequate consideration, Called Clubbing provisions.
However, Mr. Sharma could have start Invested in the name of Ram Sharma( HUF ) a clubbing provisions are not applicable on HUF in this case
Disadvantages:
- Need to go through the initial process of HUF affidavit work.
- Need to file Income tax return similar to Personal income tax return.
Conditions for HUF:
HUF can be formed only by Hindus, Sikhs, Buddhists, and Jains and a person should be married however A person can also register HUF in the parent’s name moreover, A Widow can also register its HUF.
Process of HUF Formation:
Step 1: Preparing HUF Affidavit( HUF Deed )
Draft an HUF Affidavit, also known as the HUF Deed, to formally declare the creation of the Hindu Undivided Family. This document should specify the Karta (head of the HUF), list family members, and outline the purpose of forming the HUF. This deed is important for legal recognition and is required to open an HUF bank account/DEMAT account
Step 2: Application of HUF PAN CARD.
Next step is Submit an application for an HUF PAN card through the NSDL or UTI portal to establish a separate tax identity for the HUF. This PAN enables the HUF to file tax returns independently, which is crucial for managing finances and availing of tax benefits associated with HUF income.
Step 3: Post PAN Card allotment and register HUF on the income tax portal.
Once the PAN card is allotted, register the HUF on the Income Tax e-filing portal under the HUF PAN. This registration allows the HUF to file income tax returns and track tax-related activities online, facilitating easier tax compliance.
Step 4: File Income tax return.
File income tax returns for the HUF using the HUF PAN. Filing the HUF’s ITR ensures that its income, deductions, and tax liabilities are accounted for separately from individual family members, allowing the HUF to benefit from separate tax slab rates.
Step 5: The client can Open a Bank Account/DEMAT HUF Account using an Affidavit
With the HUF Deed, PAN, and registration, you can open an HUF bank account or Demat account. This account enables the HUF to conduct financial transactions, invest in securities, and manage family assets separately.