Forming a HUF is a common tax-saving practice in India. Hindu Undivided Family (HUFS) can be created by any Hindu family by coming together. Taxes can be saved by creating a family unit and pooling in all the assets to form a HUF.
Apart from Hindu families, Sikhs, Jains, and Buddhists are also allowed to form HUF. A HUF will have its own PAN and tax returns are filed independently.
How Is HUF Taxed and Why Is It Different From Other Type Of Tax Entities?
So basically a HUF is taxed separately from its member, which allows it to get more deductions or exemptions allowed under tax laws. Let’s take an example to understand it better.
Example: Suppose there is a family of 4, Husband, Wife and 2 kids. If they decide to form a HUF then the HUF will be taxed separately from all the 4 members of the family. This means that the deductions allowed under Section 80C can be claimed by all 4 members of the family as well as the HUF.
So that’s the gist of the matter, now let’s delve a little deeper.
HUF will be provided a separate PAN and will have to file a separate tax return. HUF is an entity separate from their members and will be treated separately by the tax laws.
As a separate entity, HUF can pay salary to its member for performing business tasks and contributing to the overall functionality of the family one way or the other.
Tax deductions and exemptions (like Section 80) can be availed by the HUF separate from the members of the family.
HUF can take Life Insurance Policy on the life of its members. HUF can also make investments from the income made by it.
The returns from any of these investments are taxable for the HUF.
Limitations Of HUF
HUF can be formed by a single individual, only a family can combine to form a HUF.
Hindus, Buddhists, Jains, and Sikhs can form HUFs.
All the members in a HUF will have equal rights and equal say over any sale or purchase involving HUF assets.