What is HUF and how does it work?
HUF consists of all descendants of a common ancestor, and includes wives and daughters of male descendants. The Hindu Undivided Family was recognized as a separate legal entity in 1917. There are numerous undivided families in India, and the incomes earned by such families are joint incomes as opposed to individual incomes.
Because these are joint incomes rather than individual revenues, they cannot be taxed in the hands of a single individual and must therefore be taxed in the hands of the entire family. Because these are taxed in the hands of the family, the family has a different PAN Card from individual HUF members, who have a separate PAN Card.
HUF is a very efficient and lawful technique to minimize taxes, as recommended by chartered accountants.
Advantages of the HUF System
The first and most evident advantage of HUF is tax savings. Tax planning with HUF increases the number of quantifiable units by employing the HUF partition method.
The HUF will be treated as a separate entity so effectively you get an extra PAN card in the name of the HUF. Using the will or gift loopholes, you can create distinct taxable units of HUF. For tax purposes, any assets or savings made or insurance premiums paid by the HUF are deductible from the net income.
The co-parceners do not have any effective control over the management of the HUF, and all power lies with the Karta. Hence, the liability of the members has also been limited to only their share of the property. This keeps the balance between power and responsibility.
In the case that Karta or the last male member of the family dies, the official status of a HUF stays the same even in the hands of women. As a result, the HUF's ancestral or acquired assets remain in the hands of the widows and do not need to be partitioned.
HUF can own a residential house without having to pay taxes. In addition, it can also avail of a Home Loan to purchase a residential property and get tax benefits up to Rs 1.5 lakh under Section 80C of the Income Tax Act for loan repayment and up to Rs 2 lakh for interest thereon.
It can benefit from a basic tax exemption limit of 2.5 lakhs, make investments in ELSS, PPF, and Fixed deposits and claim deductions.
No nucleus or ancestral joint family assets are required for the HUF to exist.
Drawbacks of creating HUF:
There are numerous benefits to forming a HUF, but there are also drawbacks to doing so. Here are some of the drawbacks of forming a HUF:
One of the biggest disadvantages of forming HUF is that every member of the family has equal rights to the family's assets. The common property cannot be sold without the consent of all the members. Besides that, births and marriages add to the number of family members.
Closing a HUF is far more difficult than forming one. Partitioning the family with a small group may result in the dissolution of the HUF. After dissolving the HUF, the family's assets must be dispersed among all family members, which can be difficult to manage at times. Furthermore, legal issues cause additional disruptions.
Coparceners of a HUF cannot gift or transfer their rights to the assets of the HUF during their lifetime. They can, however, bequeath their share in the HUF assets through a Will.
The absolute dominance of Karta’s overall business and financial decisions make causes conflict among the HUF. His decisions and business acumen may be questioned by other members, and cause issues within the HUF.
Conclusion
As a responsible citizen, one must pay taxes regularly but one can also avail of the benefits provided by the government. By creating a HUF one can legally save taxes and enjoy different tax exemptions in the long run.
