Understanding HUF: Tax Benefits & Formation Guide

HUF or, Hindu Undivided Family (HUF) is an immensely popular concept in India for several reasons. One of the main reasons being the opportunity for tax savings. If you're a member of a Hindu family, operating within the guidelines of the HUF structure can help reduce your tax burden. It also help with efficient wealth management for your family. This blog delves into what an HUF is, its recognition under the Income Tax Act, and the tax benefits it offers under both the old and new tax regimes.

What is HUF as per the Income Tax Act of India?

A HUF is a unique entity under Hindu law composed of individuals who are all direct descendants of the same ancestor. This family structure includes the Karta (head of the family), who runs the HUF, and other members known as coparceners. Every time a Hindu family member marries and has children, a HUF is automatically created. The Hindu family is recognized as a distinct legal entity under the Income Tax Act. This means that the family, as an entity, can own property and have income that’s separate from its individual members.

Moreover, HUFs can also be the legal owners of the family’s ancestral property. An individual’s will can also nominate an HUF as their beneficiary, meaning that their property and wealth will be transferred to the HUF as a whole. Members of the HUF can also pool their wealth into a common property or account instead of holding individual assets.

How to Form an HUF?

Follow the instructions given below to form an HUF with your family members:

• The first step to creating an HUF is to write down an HUF deed. The HUF deed will be a formal declaration written on stamped paper that notes down all the properties and assets of the HUF.
• The deed will also need to mention the name of the Karta, who is the eldest member of the family and the de facto head of the HUF. Along with the Karta, the HUF deed must also mention all the names of the Coparceners (family members part of the HUF).
• Once the HUF is registered, you will need to apply for a PAN number as well as a new HUF bank account.

Note that only Hindu, Jain, Buddhist, and Sikh families can form an HUF. Moreover, only joint families that share assets are eligible candidates. You will also have to submit ID proof (PAN card, Aadhaar card etc.) and photographs for each member of the HUF.

Provisions for HUF in Old and New Income Tax Regime

The Indian tax system has two distinct tax regimes. The old regime has higher tax brackets but comes with various deductions and exemptions. On the other hand, the new regime has fewer deductions but features lower rates of taxation. Both regimes offer their own specific guidelines for HUFs.

Under the old system of taxation, HUFs are entitled to various deductions under Sections 80C, 80D and 24(B). Investments in ULIPs, term insurance, life insurance, guaranteed income plans, ELSS, and health insurance are all tax deductible for a HUF. The new system, while cutting overall rates, does eliminate many of these deductions. However, it still offers benefits of basic exemption with some allowances being included in the mix.

Tax Benefits for HUF Under the Old and New Income Tax Regime

Under the Old Tax Regime, HUFs enjoy several tax benefits, including:

• Deductions under Section 80C: HUFs can claim deductions up to ₹1.5 lakh for investments in instruments like guaranteed income plans, ULIPs, term and other life insurance premiums, PPF, ELSS, NSC, and principal repayment on home loans.
• Health Insurance (Section 80D): Health insurance premiums paid for any member of the HUF is eligible for annual tax deductions of up to ₹25,000. An additional ₹50,000 is deductible if the members are senior citizens.
• Home Loan Interest (Section 24(B)): Interest on home loans can be claimed as a deduction up to ₹2 lakh per annum.
• Educational Expenses: Education expenses/tuition fees up to ₹1.5 lakhs can be claimed annually under Section 80C.
• Standard Deduction: Salaried members can claim a standard deduction of ₹50,000 under Section 16 of the Income Tax Act.
• Additional Benefits: HUFs can also benefit from tax-saving fixed deposits and contributions to the National Pension Scheme (NPS).

The new tax regime offers lower tax rates but removes most deductions and exemptions:

• Reduced Tax Rates: The new regime provides lower tax rates across various income slabs, making it beneficial for HUFs with higher incomes.
• Basic Exemption Limit: HUFs still enjoy the basic exemption limit, which is ₹2.5 lakh per annum, and ₹3 lakh per annum for senior citizens.
• Standard Deduction: Salaried members can continue to claim a standard deduction of ₹50,000.
• Interest on Savings: Interest income from savings accounts is exempt up to ₹10,000 under Section 80TTA.

Overview of HUF Tax Benefits Under the Old and New Income Tax Regimes

Here’s taking a closer look at how the tax benefits for HUFs stack up under both the tax regimes.

Benefit Type	Old Tax Regime	New Tax Regime
Section 80C Deductions	Up to ₹1.5 lakh	Not Available
Section 80D Deductions	Up to ₹25,000 (₹50,000 for seniors)	Not Available
Section 24(b) Deductions	Up to ₹2 lakh	Not Available
Standard Deduction	₹50,000	₹50,000
Basic Exemption Limit	₹2.5 lakh	₹2.5 lakh
Interest on Savings	Exempt up to ₹10,000 (Section 80TTA)	Exempt up to ₹10,000 (Section 80TTA)
Reduced Tax Rates	Not Applicable	Applicable
Other Investments	Available (NPS, FDs)	Not Available

 

Conclusion

HUFs can substantially reduce your family's income tax burden if you leverage the various deductions and exemptions. The old regime of the Income Tax Act has multiple sections that offer a variety of tax-saving options. Alternatively, the appeal of the new regime is its lower tax rates. Understanding the benefits of both regimes and organizing your finances wisely will lead to greater savings for your entire family!

 

Aastha Mestry - Portfolio Manager 
An Author and a Full-Time Portfolio Manager, Aastha has 6 years of experience working in the Insurance Industry with businesses globally. With a profound interest in traveling, Aastha also loves to blog in her free time.