When a common ancestor and his lineally descended family members together form a group, it is known as a Hindu Undivided Family or a HUF. Hindus, Jains, Buddhists and Sikhs can create a family unit and club their assets together to form HUFs. In 1917, the Hindu Undivided Family was first recognised as a separate taxable entity. Many families have enjoyed HUF tax benefits over the years and used it to build their assets.
HUF tax benefits
Here are the various kinds of tax benefits a HUF can avail-
1. Income tax benefits :
From a legal perspective, a HUF is an identity separate from its members. The individual members of the Hindu Undivided Family have their PAN cards, and the HUF also has a different PAN card. A HUF can have its own business from which it generates income. A HUF can also participate in the share market and invest in Mutual funds and shares. Since it is a separate entity, it can enjoy a basic tax exemption amounting to Rs 2.5 lakh. So, let us suppose that an individual creates a HUF along with his spouse and two children. The members will enjoy income tax benefits as individuals. Along with this, the HUF will also be able to avail income tax deductions additionally, independent of its members.
2. Owning a house :
According to the current income tax laws, if an individual owns more than one self-occupied property, he is allowed to claim only one of them as his self-occupied property. The others will be considered as ‘deemed to be let out’, and you are required to pay tax on national rent. But, a HUF can also own residential property without paying taxes for it. It is also eligible to purchase a house by taking a Home Loan. Section 80C of the Income Tax Act permits a tax deduction of Rs 1.5 lakh in a financial year for loan repayment, to which the HUF is also eligible. The interest on the home loan repayment also attracts a tax deduction of Rs 2 lakh.
3. Life Insurance :
Individuals are allowed to claim tax benefits for certain investments and payments they make during a financial year. In the list of HUF benefits, these are also included. A Hindu Undivided Family can pay the life insurance premium for its members, and then claim tax benefits for this. The section 80C permits a maximum deduction of Rs 1.5 lakh for life insurance premiums paid.
4. Investments :
The section 80C also permits HUFs to invest in other tax-saving devices like Equity Linked Savings Scheme and Fixed Deposits and get tax-deductions of up to Rs 1.5 lakh. A Public Provident Fund account cannot be opened in the name of a HUF. But, the amount the HUF deposits in the PPF accounts of its constituent members is eligible for tax deductions.
5. Health Insurance
The section 80D permits tax deductions of up to Rs 25,000 for premiums paid on health insurance for an individual, spouse and dependent children. But, with the rising cost of medical treatments, medical insurance is also becoming more expensive. So, the tax deduction might prove to be insufficient to cover decent medical insurance. A HUF can prove to be a considerable advantage in this scenario. A HUF can claim an additional Tax deduction of Rs 25,000 for the health insurance premiums paid for its members. If the health insurance premium is for a senior citizen, then the tax deduction limit is set at Rs 50,000 for the HUF.
There are different tax benefits provided by the government, and you should make use of them. Many people choose to create a HUF for the tax benefits it offers in the long run. The benefits of HUF in income tax are visible, which is why it is so popularly used as a way to save income tax.