How to plan your finances with Hindu Undivided Family (HUF)

Succession planning is a crucial aspect for any family. There is a plethora of examples around us where proper succession planning wasn’t in place and it complicated and messed up matters.

But what if there was a structured framework that not only aids in succession planning but also brings along significant tax benefits?

This is possible by forming a HUF i.e. the Hindu Undivided Family.

In this article, we will delve into the details of Hindu Undivided Family, understand its definition, structure, tax implications, and how it can be a strategic tool for financial planning.

What is an HUF?

Forming an HUF is straightforward – all you need is a family.

For instance, Mr. Sharma, his wife, and their two kids together form an HUF. And then individuals who lineally descend in that family will automatically become a part of Mr. Sharma’s HUF.

Every HUF has three types of members:

a) Karta

The Karta is generally the eldest male member in the family, in our case Mr. Sharma. Keep in mind that the assets of the HUF are owned by the entire family, and the Karta is just a manager and decision-maker.

b) Coparcener

Coparceners are members who get a share in the properties or assets owned by the HUF by birth. They can demand their share in the HUF and even ask for partition. Quite obviously, the Karta is also one of the coparceners.

c) Member

Members also have a right in the properties or assets of the HUF. They are entitled to all the benefits from the HUF and its income. However, unlike coparceners, they cannot demand partition of the HUF and exercise their rights to the assets.

An HUF persists until dissolution and can add coparceners up to four generations. After that, only membership is possible. Assets are collectively owned, with each member’s share determined by the familial hierarchy.

Tax implications on HUF

For tax purposes, HUF is treated as a separate entity and requires a distinct Income Tax Return (ITR).

It follows the same income tax slabs as individual taxpayers, with available deductions similar to those for individuals.

Various deductions, including those under sections 80C, 80D, and 80G, are available. Refer to the image below.

However, standard deductions and tax rebates applicable to salaried individuals are not extended to HUFs.

Further, while an HUF cannot have a PPF account in its name, it can claim deductions for amounts deposited by the HUF in the PPF accounts of its members.

Planning your finances using HUF

The real power of an HUF lies in its ability to facilitate tax planning and financial strategizing.

Some of the most common examples of how you can use HUF to save taxes are as follows:

Transferring ancestral property on HUF’s name

Suppose you have an ancestral property in your name that generates rental income. If you fall in the 30% slab, you will have to pay a 30% tax on this rental income. But you can transfer the property to the HUF’s name, and if the rental income is less than the basic exemption limit of ₹2.5 lakhs, you would be paying ZERO taxes on this income. And even if it is above 2.5 lakhs, the tax rate would be much lower than it would have been in your case.

Opening a demat account on HUF’s PAN

Many people open a demat account using their HUF’s PAN and use it to apply for IPOs to increase their chances of getting an allotment.

Further, people also use it to invest and trade in securities, thereby distributing their capital gains or profits between multiple demat accounts, thereby reducing their tax liability.

Transferring money to HUF’s bank account

If a husband and wife are both salaried employees, they can pool their capital and transfer it to the HUF’s bank account. This can result in a tax-free interest income of up to ₹2.5 lakhs because of the basic exemption limit.

Accepting gifts

An HUF can also accept gifts. While gifts received from members are non-taxable, gifts from non-members are taxed as Income From Other Sources (IFOS) if the cumulative value of gifts received is greater than ₹50,000 in a particular financial year.

If the HUF doesn’t have any income source, then it can receive a gift of 4 lakh rupees without paying taxes — by availing the ₹2.5 lakh basic exemption and claiming the remaining ₹1.5 lakhs as a deduction under Section 80C by investing in tax-saving instruments like ELSS.

Deduction on home loan repayments

By adding the HUF as co-borrower in a home loan, the HUF can claim the following deductions:

i) Home loan interest of up to ₹2 lakh under Section 24(b), and

ii) Principal repayment of up to ₹1.5 lakh under Section 80C.

Watch the video on our channel to learn more about these in detail.

Conclusion

Despite its potential benefits, forming an HUF and transferring assets may involve complexities and costs. Additionally, joint assets cannot be sold without the consent of all members, which can pose challenges as families expand.

However, when planned meticulously with a long-term perspective, HUF can emerge as a powerful tool for tax planning. Whether you possess ancestral property, multiple income streams, or seek an extra demat account for IPO investments, forming an HUF can be a worthwhile consideration.

If you found this information valuable, please feel free to ask any questions or share your thoughts in the comments. You can also visit Quicko, India’s leading tax filing platform, if you want any assistance with saving, planning, or filing your taxes.

That’s it for today, see you in the next one!