The Hindu Undivided Family Act is a special kind of corporate identity that is exclusive to India. Through the HUF Act, Hindus can save money on taxes. However, the Hindu Undivided Family Act has some rules that you will learn about in this article along with some of its benefits and drawbacks.
Hindu Undivided Family?
Hindu households in India founded the Hindu Undivided Family or HUF. Sikhs, Jain, and Buddhists are also able to create Hindu Undivided Families. Hindus can unite through this act and create an entity that will save them a significant amount of tax money. The act submits a tax return on its own behalf and has its own PAN.
How Are HUFs Formed?
The tax benefits are a primary motivation for forming a HUF. To do so, though, you must accept the terms and conditions listed below.
1. HUFs ought to be limited to families.
2. As previously stated, Jains, Sikhs, and Buddhists can form a HUF.
3. When they get married, it is automatically made for the newest member of the family.
4. This act typically involves a common ancestor and all of his lineal descendants, including their spouses and daughters who are not married.
Typically, HUF possesses assets that are bequests, wills, or inherited property.
5. The entity needs to be properly registered after it is created. It ought to have a formal Deed. Details on the HUF’s members and operations should be included in the deed. It is necessary to open a bank account under the Hindu Undivided Family name. After that, a PAN will be produced.
Benefits and drawbacks of the Hindu Undivided Family Act.
There are a lot of benefits and drawbacks to creating a HUF.
Benefits of HUF
1. Members are subject to taxation in the same manner as individuals. A person must conduct a tax audit under the supervision of a CA if a member’s business turnover surpasses Rs. 25 lakh or Rs. 1 crore, as specified in section 44AB of the Income Tax Act.
2. The appropriate documents may be signed by the HUF leader on behalf of other members.
3. Different HUF taxable units can be formed. For tax purposes, any asset, savings, or insurance premium paid by the HUF will be deducted from net income.
4. Because they can create two PAN cards and file taxes separately, this is one of the main reasons why most families form HUFs.
5. If a woman’s husband is a Karta, she may be a co-partner in the HUF. Therefore, this cannot be increased by the woman’s additional income.
6. If the Karta or the last family member dies, the official stature doesn’t change. As a result, the widow will retain ownership of the HUF’s acquired and ancestral assets, and no division is required.
7. A child who has been adopted may also join the HUF family.
8. A woman who owns property in her family’s name may give it to another woman in the family.
9. Loans are widely accessible to Hindu Undivided Family members.
10. Apart from Kerala, this act is recognized throughout India.
Disadvantages of HUF
1. The fact that each member of the HUF has equal rights on the property is one of its biggest drawbacks. No member may sell the common property without the approval of all other members. Additionally, a member has equal privileges by virtue of their marriage or birth.
2. When it comes to HUFs, closing them is more difficult than opening them. The HUF may split as a result of a family with a small group splitting apart. The distribution of the asset to all HUF members when the HUF closes can prove to be an enormous undertaking.
3. The income tax agency views HUF as a distinct tax entity. Joint families are becoming increasingly less significant in today’s world. There have been several reports of property disputes amongst HUF members. Additionally, as a result of the increase in divorce cases, HUF’s ability to save taxes is diminishing.
Utilizing the HUF Structure for Tax Savings
The main motivation for creating a HUF is to receive tax advantages and an extra HUF PAN Card. Members of the HUF are exempt from individual taxation after the organization is constituted.
The HUF may file an ITR using the new PAN. The HUF family will be required to pay tax at the rates of 10%, 20%, and 30% of the income tax slab if their combined income surpasses Rs. 25 lakh or Rs. 1 crore.
Let’s examine the idea of HUF in more detail:
A family, for example, consists of a husband, wife, and three children. The husband makes twenty lakh rupees a year, whereas the woman makes fifteen lakh rupees. They additionally receive Rs. 6 lakh in income from their ancestral land.
Currently, retaining the yearly personal income apart. Either the husband or the wife, or both of them, would be subject to taxes on the income from the ancestral property. Examine the ensuing details to understand its operation.
Should the husband be subject to land tax, he will be required to pay thirty percent of the tax, based on the income tax slab. This means that out of Rs. 6 lakh, he will pay income tax of Rs. 1.8 lakh. Likewise, in the event that the wife’s land is subject to land tax, she will also be taxed at the rate of thirty percent. Of the six lakhs, she will also ultimately pay Rs. 1.8 lakh.
If the husband and wife are both subject to taxes, they must pay thirty percent of the Rs. 6 lakh. Together, their payments will total 90,000 + 90,000 = 1,80,000.
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Additionally, you can benefit from additional tax benefits on land rent under the Hindu Undivided Family Act. A HUF member is eligible for tax benefits between Rs. 60,000 and Rs. 70,000. You can save roughly Rs. 1,80,000 – Rs. 60,000 = Rs. 1,20,000 in taxes if you pay 30% of the total tax. The land will require you to pay a taxable amount of Rs. 1,20,000.