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How to save tax through HUF?

IndianMoney.com Research Team | Posted On Saturday, March 21,2020, 11:36 AM

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How to save tax through HUF?

 

 

HUF or the Hindu Undivided Family is an excellent way of saving tax. The HUF is taxed separately from its members. Any Hindu family and Jains, Sikhs and even Buddhists may come together and form an HUF. What’s special about the HUF? The HUF has its own PAN and can file taxes independent of members.

What is HUF? The Hindu Undivided Family mainly consists of individuals who are lineally descended from a common ancestor. You also have unmarried daughters who are part of the HUF. The Hindu Undivided Family is created automatically in any Hindu family and not through a contract. A common ancestor is a must to form the HUF.

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See Also: HUF - Hindu Undivided Family Act And Its Tax Benefits

How to save tax through HUF?

How to form HUF?

You need at least 2 members to start an HUF. This is the minimum which constitutes a joint family. It’s automatically formed when a person marries and starts a family.

What’s special about HUF?

Well, the income does not belong to any specific individual. It belongs to the entire family. The income gets taxed in the hands of the HUF. The HUF is considered a distinct entity for tax purposes with a separate PAN Card and must file separate IT returns.

In simple terms HUF is a legal entity with a separate PAN Card and bank account in the name of HUF. In an HUF the eldest member of the family is the ‘Karta’ and he enjoys additional exemption. Women are not allowed to become Karta of HUF.

How to create HUF?

  • Create the HUF Deed:

The HUF Deed is a legal document on a stamp paper which gives names of Karta and coparceners. Each family member must declare Karta name and agree to it.

  • Get HUF PAN Card

Fill Form 49A and apply for PAN Card.

  • Open the HUF Bank Account

The HUF must have separate bank account for payments opened at any bank.

How is HUF taxed?

The HUF enjoys all Section 80 deductions. He can avail insurance policies for HUF members. Salaries can be paid by the HUF if they contribute to the functioning of the HUF. Investments can easily be made from HUF income which is taxed in the hands of the HUF. Taxation is at the same rate as the individual.

How to save tax with HUF?

Let’s understand this with an example. After the death on his father, Naresh started an HUF with his wife and son as members of this HUF. Naresh was a single child and his father’s property was easily transferred to him. This property earned an annual rent of Rs 8 Lakh. Naresh has a salary of Rs 15 Lakhs and he creates an HUF to save tax.

Income from various sources

Income of Naresh before HUF (Rs)

Income of Naresh after HUF

Income of HUF

Salary

1500000

1500000

 

House Property Rent

800000

 

800000

Standard Deduction on House Property

240000

 

240000

Income from house property

560000

 

560000

Total taxable income

2060000

1500000

560000

Section 80C

150000

150000

150000

Net taxable income

1910000

1350000

410000

Tax Payable

400920

226200

8320

Total tax paid by Naresh and HUF = 2,34,520.

Tax saving due to forming an HUF = 1,66,400.

See Also: Last Minute Tips to Save Tax

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