Understanding HUF in Income Tax: Benefits, Exemptions, and Rules

The time is almost here to file returns and pay income tax. By July 31st, all taxpayers must file their taxes. Every taxpayer attempts to save taxes when filing their ITR.

HUF

Is there a separate tax exemption for Hindu families? This exemption isn’t restricted to a specific family but can be availed by any Hindu family nationwide. Additionally, Jains and Sikhs also benefit from this provision. Consequently, AIMIM leader Asaduddin Owaisi has proposed either abolishing this scheme or extending its benefits to Muslims as well.

There is a distinct provision in the Indian Income Tax Act for Hindu Undivided Families (HUF). Any Hindu family can establish an account under HUF, where transactions and income are treated separately, akin to an individual. Naturally, the HUF also qualifies for all tax exemptions available to individual taxpayers.

How to Access the Benefit?

To access the benefits of HUF, you must obtain a separate PAN (Permanent Account Number). Using this PAN, all financial activities must be conducted. Within an HUF, the family head assumes responsibility for actions, while other family members are considered members. Individuals become HUF members through birth or marriage. This allows for individual investments in an HUF account and eligibility for tax benefits.

HUF

Understanding the Functioning of the HUF Act

In an HUF, you can invest individually and claim tax exemptions. However, it’s important to note that if you invest your earned money into it, you cannot claim tax exemptions.

For instance, if you are a salaried individual earning Rs 10 lakh per annum and you start a side business, any income generated from this business will be added to your total income. If you earn an additional Rs 5 lakh from the business, your total income will reach Rs 15 lakh, surpassing the higher tax bracket. Additionally, you won’t receive tax exemptions on this Rs 5 lakh income since you’ve already utilized the full tax exemption on your Rs 10 lakh income.

If you establish a HUF account and operate a side business under its name, the income up to Rs 5 lakh will be entirely tax-free. When considering a HUF as an individual entity, it is eligible for a basic tax exemption of Rs 2.5 lakh. Additionally, there is a rebate of Rs 12,500 on the remaining Rs 2.5 lakh, resulting in zero tax liability. However, it’s important to note that if you deposit your salary into this account, you cannot claim tax exemption. To qualify for tax exemption under HUF, the income must be earned beyond the scope of the HUF entity.

What Tax Benefits are Available?

Under section 80C of the income tax, investments in life insurance, mutual funds, PPF, small savings plans, house loans, and ELSS are exempt from tax up to Rs 1.5 lakh.

You are eligible for a section 80D reimbursement of Rs 25,000 on health insurance premiums for your family and yourself, as well as Rs 50,000 on premiums for your aged parents.

You can purchase a home in the HUF’s name, and section 24B will exclude you from paying taxes on the interest on that purchase up to a total of Rs. 2 lakh.

Investing in stock or equity funds under section 54F also exempts you from long-term capital gains up to Rs 1 lakh annually.

Any income over this will be subject to a 10% tax.

Additionally, two properties may be purchased tax-free in the name of HUF.

If the value of your property exceeds this threshold, you will be required to pay tax based on the national rent.

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