HUF Tax Benefits: How to Save Income Tax?
The Hindu Undivided Family (HUF) is a unique entity under Indian tax laws, providing various tax benefits that can significantly aid in tax planning and savings. This blog delves into the tax implications of HUF, highlighting the relevant sections from the Income Tax Act and exploring various methods of tax planning.
Tax Benefits and Implications of HUF
HUFs are eligible for a range of tax benefits under Indian tax law. Here are the key points:
Tax Exemptions and Deductions
HUFs can claim several exemptions and deductions, similar to individual taxpayers. These include:
- Standard Deduction: HUFs can claim standard deductions under Section 16 of the Income Tax Act.
- Deductions under Section 80C to 80U: Like individuals, HUFs can claim deductions for various investments and expenditures.
Income from HUF Property
Income earned from HUF property is taxed in the hands of the HUF and not the individual members. This includes income from:
- Business Income: If the HUF carries on a business, the income is taxed as business income of the HUF.
- Property Income: Rental income from property owned by the HUF is taxed as HUF income.
Gifts to HUF
Gifts received by the HUF from its members are exempt from tax under Section 56(2)(x), provided the amount does not exceed ₹50,000 during a financial year. For example:
- If Mr. A, a member of an HUF, gifts ₹ 50,000 to the HUF, this amount is exempt from tax since Mr. A is a relative as defined under the Act.
Partial Partition of HUF
HUFs can undergo partial partition to manage assets effectively. However, it’s essential to note that the income from such assets will continue to be taxed as HUF income.
Computation of HUF Income
Here is an example to illustrate the computation of HUF income:
Illustration: Mr. Ram (aged 56) is the Karta of his HUF, consisting of himself, his wife, and two sons. The HUF has a business income of ₹5,00,000 for the year ended 31.3.2024. Mr. Ram’s personal salary income is ₹6,10,000. If Mr. Ram’s son gifts ₹1,00,000 to the HUF, this amount is exempt from tax.
Solution:
- Business Income of HUF: ₹5,00,000
- Salary Income of Mr. Ram: ₹6,10,000 (taxed individually)
Total income of HUF remains ₹5,00,000 since the gift is not taxable.
Tax Rates for HUF
HUFs can opt for the new tax regime under Section 115BAC, which provides concessional tax rates but requires the HUF to forego certain exemptions and deductions:
| Income Slab (₹) | Tax Rate under Section 115BAC |
| Upto 3,00,000 | NIL |
| 3,00,001 to 6,00,000 | 5% |
| 6,00,001 to 9,00,000 | 10% |
| 9,00,001 to 12,00,000 | 15% |
| 12,00,001 to 15,00,000 | 20% |
| Above 15,00,000 | 30% |
Surcharge Rates
HUFs with total income exceeding ₹2 crores and ₹5 crores are subject to higher surcharge rates of 25% and 37%, respectively, if they opt out of the default tax regime. However, these higher rates do not apply to income from dividends and capital gains taxed at special rates under Sections 111A, 112, and 112A.
Tax Planning Strategies for HUF
- Creating an HUF: Forming an HUF is the first step towards availing tax benefits. An HUF can be created at the time of marriage or by acquiring ancestral property.
- Income Splitting: Income can be split between individual members and the HUF to reduce the overall tax liability. For example, rental income from a property can be shown as HUF income.
- Investments: HUFs can invest in tax-saving instruments under Section 80C, such as PPF, ELSS, and life insurance premiums, to avail deductions.
- Gifts and Loans: Members can gift money to the HUF, and the HUF can invest this money. Loans from members to the HUF can also be structured to maximize tax benefits.
Conclusion
HUFs offer significant tax planning opportunities that can help in reducing the overall tax burden. By understanding the tax implications and strategically planning investments and income, HUFs can effectively save on income tax. It is advisable to consult a tax professional to ensure compliance with tax laws and to optimize tax savings.
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