Tax saving by Hindu Undivided Family

According to chartered accountants, the HUF, or Hindu Undivided Family, is a highly practical and legitimate approach to reducing your tax burden. There are many intact families in India, and these families often generate joint income as opposed to individual income.

Since these are joint revenues rather than individual incomes, they cannot be taxed in the hands of a single person and must instead be taxed on behalf of the entire family. The family has a different PAN card since these are taxed in its name, as opposed to the HUF’s individual members, who likewise have a separate PAN card.

Hindu Undivided Family
Image Credit- Getty Images. Hindu Undivided Family

With the aid of an illustration, it will be easier to understand how opening a Hindu Undivided Family Account would result in tax savings. Let’s imagine that a family consists of a husband, a wife, and two kids. The husband makes Rs. 25 lakhs in income, while the wife makes Rs. 18 lakhs. They also own a family home from which they receive annual rent of Rs. 8 lakhs.

Either the husband or the wife, or both, would be responsible for paying taxes on the rent on such a property.

Case 1: The spouse, who is now in the 30% Income Tax Slab Category, would be obliged to pay 30% of Rs. 8 Lakhs, or Rs. 2.4 Lakhs, as Tax if taxed in his hands.

Case 2: The wife, who is now in the 30% Income Tax Slab Category, would be obliged to pay 30% of Rs. 8 Lakhs, or Rs. 2.4 Lakhs, as Tax if the income were taxed in her hands.

Case 3: If both husband and wife were subject to taxation at the same rate of Rs. 4 lakh each, they would both be obliged to pay tax at the rate of 30% on Rs. 4 lakh, or Rs. 1.2 lakh each, resulting in a total tax outlay of Rs. 2.4 lakh.

There is, however, a better method for planning your income taxes. Due to the fact that this income is derived from a family-owned asset, it will be taxed in the family’s name (if a HUF is created), allowing you to benefit from lower rates.

Case 4: If this rental income of Rs. 8 lakhs is taxed by the HUF, the HUF will pay between Rs. 70,000 and Rs. 80,000 in tax, calculated using the Slab Rates (depending on the income tax deductions claimed by the HUF)

A tax savings of Rs. 1,80,000 per year would result from taxing this rental income through the HUF (Rs. 2,40,000 – Rs. 60,000)

Hindu Undivided Family
Mother and daughter sitting together near a Rangoli design during Diwali festival

Although we limited our explanation of the concept in this article to rental income for simplicity, the idea of creating a HUF to reduce taxes may be extended to many other types of income that are received by the family as a whole.

Advantages and disadvantages of Hindu Undivided Family.

The main benefit of opening a Hindu Undivided Family Account is that the family receives an additional PAN Card, which allows them to share their income and save taxes. This is the primary reason that CAs encourage their customers to establish a HUF in order to reduce their annual tax liability by up to Rs. 1.8 lakhs (as explained above).

It should be emphasized that there is a drawback as well, namely that any assets held in the name of the Hindu Undivided Family are assets of the family as a whole and not just of one particular person. All family members are entitled to share in the Hindu Undivided Family’s assets.

Therefore, due diligence should be taken while giving assets to the Hindu Undivided Family as the entire family would have a stake in the assets, as opposed to the case if the assets were in the name of a single person, who would have exclusive ownership rights.

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