Tax Benefits For Hindu Undivided Family

Hindu undivided family is considered as a ‘person’ according to section 2(31) of the Income tax Act, 1961. This segregation has been done for the purpose of assessment under Income tax act. 

 

Table of Contents

• What is Hindu Undivided Family?
• Structure of an HUF
• How to open an HUF account?
• Tax benefits to Hindu Undivided Family

What is Hindu Undivided Family?

According to the Hindu law, HUF is a family consisting of everyone lineally descending from a common ancestor including wives and unmarried daughter. While Sikh and Jain are not governed by Hindu law, they are still treated as HUF. Hindu undivided family is not created through any contract but it is created automatically within hindu family. However, there is an exception. When a stranger by adoption or marriage becomes the member of the HUF.

Structure of an HUF

Hindu Undivided Family has the following structure:

• Karta: This is mostly the eldest male member of the family. Karta manages the affairs of HUF and is also the decision-maker. However, the decisions related to major transactions require the consent of coparceners. 
• Coparcener: It is a male individual who has the legal share in the ancestral property owned by the family. Male members (except karta) and children of male coparceners are also coparceners. Until these children reach a legal age, they are considered as minor coparceners. 
• Members: All individuals residing and contributing to the Hindu Undivided Family, excluding individuals with a direct ancestral lineage to the family's founding male member(s). Wives and mothers of coparceners, unmarried and married daughters, sisters and dependents are members.
• Dependents: These are extended family members including in-laws and other dependents who live with HUF and utilize its resources.

Do remember that:

• A single member or coparcener is not eligible to form an HUF
• Two people can form HUF 
• A single male member is enough to form an HUF
• Dependents are not a mandatory part of an HUF

How to Open An HUF Account?

Opening a Hindu Undivided Family (HUF) account involves specific rules and procedures due to its unique legal status. Here is a breakdown of the key things to know:

1. Eligibility

• The HUF must be officially recognized and legally constituted. This typically involves documenting the lineage and having at least three generations of male descendants from the common ancestor.
• All HUF members must be identified, and their relationship to the Karta (family head) clearly established.

2. Documentation

• Proof of HUF existence: Documents like the genealogical tree, ancestral property deeds, or inheritance documentation proving the HUF lineage may be required.
• Identity documents: PAN card of the Karta and other adult coparceners (depending on bank requirements).
• Address proof: Bank statements, utility bills, or other documents verifying the HUF's address.

3. Account types

• Current account: Suitable for regular transactions and managing HUF income and expenses.
• Savings account: Earns interest on deposits and offers basic banking features.
• Joint account: All Karta and adult coparceners may be added as account holders for shared access and control.

4. Karta's role

• The Karta usually acts as the primary signatory and manages the account on behalf of the HUF.
• In some cases, other coparceners may require co-signing authority based on bank policies or internal HUF agreements.

Tax Benefits for HUF

Hindu Undivided Families (HUFs) enjoy several tax benefits compared to individuals, making them a compelling option for families considering tax optimization. Here's a rundown of the key advantages:

1. Separate Tax Entity

• HUFs are treated as a separate tax entity from their individual members. This means the HUF can have its own income, expenses, and tax liability.
• This separation allows the HUF to utilize a different income tax slab than individual members, with a lower exemption limit (currently at ₹2.5 lakhs) and lower tax rates at lower income levels.

2. Shared Deductions

HUFs can claim various deductions available to individuals on a shared basis, effectively maximizing the potential tax savings. Examples include the following:

• Section 80C deductions: Investments in tax-saving instruments like Public Provident Fund (PPF), National Pension Scheme (NPS), and Equity Linked Savings Schemes (ELSS) can be claimed up to a total of ₹1.5 lakhs by the HUF and its members combined.
• Medical insurance premiums: Premiums paid for health insurance for HUF members and their dependents can be claimed as deductions.
• Education loans: Interest paid on education loans taken for any coparcener's children can be claimed by the HUF.

3. Clubbing of Income

• While offering benefits, the "clubbing of income" rule applies to income deemed to be arising from individual coparceners but accruing to the HUF. Examples include income from joint family accounts, agricultural income, or business income controlled by a coparcener.
• However, there are ways to minimize clubbing effects by diversifying income sources and ensuring proper accounting within the HUF.

4. Capital Gains Exemption

• HUFs enjoy exemption on certain capital gains arising from the sale of ancestral property inherited from a common ancestor. This further adds to their tax advantage.

5. Additional Benefits

• HUFs can claim deductions for housing loan interest and home loan principal repayment under relevant sections like 24(b) and 80C.
• They can also avail of tax benefits on gifts received from coparceners up to a specific limit.