HUF means Hindu Undivided Family. You can save taxes by creating a family unit and pooling in assets to form a HUF. HUF is taxed separately from its members. A Hindu family can come together and form a HUF. Buddhists, Jains, and Sikhs can also form a HUF. HUF has its own PAN and files tax returns independent of its members.
How to save tax by forming an HUF?
A HUF is taxed separately from its members, therefore, deductions (such as under Section 80) or exemptions allowed under the tax laws can be claimed by it separately. For example, if you and your spouse along with your 2 children decide to create a HUF, all 4 of you as well as the HUF can claim a deduction for Section 80C. HUF is usually used by families as a means to build assets.
How is HUF taxed?
- HUF has its own PAN and files a separate tax return. A separate joint Hindu family business is created since it has an entity separate from its members.
- Deductions under section 80 and other exemptions can be claimed by the HUF in its income tax return.
- HUF can take an insurance policy on the life of its members.
- HUF can pay a salary to its members if they contribute to its functioning of the HUF. This salary expense can be deducted from the income of HUF.
- Investments can be made from HUF’s income. Any returns from these investments are taxable in the hands of the HUF.
- A HUF is taxed at the same rates as an individual.
How to form an HUF?
While there are tax advantages of forming an HUF, you must also meet some conditions –
- One person cannot form HUF, it can only be formed by a family.
- A HUF is automatically created at the time of marriage.
- HUF consists of a common ancestor and all of his lineal descendants, including their wives and unmarried daughters.
- Hindus, Buddhists, Jains and Sikhs can form HUFs.
- HUF usually has assets which come as a gift, a will, or ancestral property, or property acquired from the sale of joint family property or property contributed to the common pool by members of HUF.
- Once a HUF is formed it must be formally registered in its name. A HUF should have a legal deed. The deed shall contain details of HUF members and the business of the HUF. A PAN number and a bank account should be opened in the name of the HUF.