Deduct members’ salaries from HUF income to lower its tax bill
HUFS can also claim tax benefits on home loan repayments, insurance premiums, and other tax-saving investments
A Hindu Undivided Family (HUF) is a legal and financial arrangement that is found only in India. The defining characteristic of an HUF is that it is taxed separately from its members. By allowing income to be spread across an additional entity (the HUF), and through its ability to claim deductions and exemptions under the Income-tax (I-T) Act, a HUF can serve as a valuable tool for reducing a family’s tax burden.
Kunal Savani, partner, Cyril Amarchand Mangaldas, says, “HUF, a uniquely Indian entity, is for large joint families and is governed by Hindu personal laws. As a distinct taxable entity, it needs to apply for its own permanent account number (PAN) and file its own tax returns, separately from its members.”
How HUF works
Besides Hindu, Jain, Sikh, or Buddhist families may also form a HUF. HUF comprises members of a family with a common ancestor. Karta, the head of the family, manages the family assets and makes decisions on behalf of the HUF. “Both individual taxpayers and the HUF can claim deductions and benefits under the I-T Act,” says Aditya Tiwari, associate, SKV Law Offices.
Rishab J., an advocate at Shivadass & Shivadass Law Chambers, explains that HUF income is taxed at slab rates specified in the Finance Act or according to the new tax regime outlined in Section 115BAC. He adds that the residential status of the HUF needs to be determined for taxation purposes.
Tax benefits HUF can avail of
Like individuals, HUFS also get the benefit of several tax deductions and exemptions. Savani says, “Individuals can reduce their overall tax burden by transferring their income-generating ancestral property to a HUF. HUFS enjoy an exemption limit of ~3 lakh under the new regime and ~2.5 lakh under the old regime.”
A HUF is also eligible for tax deduction under sections 80C, 80D, and 80G of the I-T Act, 1961. Keshav Singhania, private client leader, Singhania & Co., says, “If an individual has exhausted their 80C limit, the HUF has the option to purchase life insurance or pay a premium on behalf of its members for additional deductions.” A HUF can also take out home loans and claim tax benefits under sections 24 and 80C on interest and principal repayments respectively. Tiwari says, “This is separate from the deductions available to individual members for their respective home loans.” Often, individuals have to make mandatory contributions, such as to Employee Provident Fund, which exhaust their Section 80C limit. “In such a scenario, you can pay the premiums from your HUF account and claim the tax benefit,” says Rajarshi Dasgupta, executive director, AQUILAW.
A HUF can avail of tax deductions in its name by opening tax-saving fixed deposit accounts or investing in equitylinked savings schemes (ELSS). “HUFS cannot open a Public Provident Fund (PPF) account, but can claim deductions under Section 80C by paying into its members’ PPF accounts,” says Alay Razvi, partner, Accord Juris LLP. A HUF can leverage Section 80D to pay individual members’ health insurance premiums and claim tax benefits. Currently, the upper limit for claiming deduction under this section is ~25,000 for nonseniors and ~50,000 for seniors. This limit applies to all members combined.
Razvi says, “Note that both a member and the HUF cannot claim deduction for the same investment or expense.” Singhania explains that a HUF can pay salaries to its contributing members and deduct these expenses from its revenue, reducing its taxable income.
Points to note
A HUF managed from outside India might be treated as a non-resident for tax purposes. Savani says, “Such structures may also face heightened scrutiny under anti-avoidance provisions.” Finally, a HUF must maintain proper documentation and comply with the prescribed conditions to avail of tax benefits.