Implications of forming HUF on Income tax

Implications of forming HUF on Income tax

While computing the income tax on the income of an individual, first Rs. 2,50,000 are exempt, and such limit of income exempt from tax is known as basic exemption limit (BEL). The exemption is also available in the case of Hindu Undivided Family (HUF). The family members together can form HUF and take separate PAN for it. In such case, the deductions are also applicable on both HUF and individual accounts of family members. In case of deduction u/s 80C, apart from all family members, the HUF can also claim the deduction and save the taxes.

How HUF works in saving taxes on incomes of family members?

All family members form a Hindu Undivided Family (HUF) and took a separate PAN number for it. The HUF is formed as a joint business by family members. The members can take a salary from the revenues earned by HUF instead of their contribution to the business and commercial operations of HUF. The business starts earning revenues and paying salaries to the family members. To claim deduction u/s 80C, the HUF’s PAN can be used to take the insurance cover of the life of members. After forming the HUF, the income from house property is treated as income of HUF instead of any family member.

Assets of Hindu Undivided Family (HUF)

Whenever any gift is received or property is acquired as ancestral property or acquired by the contribution of all family members, it becomes the property of HUF and the rent from such property is considered as income of HUF instead of the income of family members. The common pool of assets whenever generates any income that is quantified as the income of HUF.

Why do people hesitate to form HUF for saving taxes?

Once the HUF is formed and assets are purchased jointly in the name of HUF. The common property is managed by all family members and due to the maintenance of equal rights of property, each family member took less interest to spend upon assets, and at the time of dissolution of HUF, there are a large number of conflicts among the family members to get equal right in the revenues generated from the business. At the time of dissolution, when assets are distributed among the family members, then such income is quantified as the individual income of each family member, leading to more tax liability. 

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