The Hindu Undivided Family (HUF), as the name suggests, is a family that includes wives and unmarried daughters, as well as those who are directly descended from a single ancestor. Any married individual, Hindu, Jain, or Sikh, can create one. A HUF's karta is its leader, and its coparceners are its members.
Before 2005, only male members could request a partition and earn an equal share of the company's assets; female members were referred to as members. Women can become coparceners thanks to the Hindu Succession (Amendment) Act of 2005.
Benefits of Forming a Hindu Undivided Family (HUF)
The formation of a Hindu Undivided Family (HUF) offers several advantages, particularly in terms of tax savings. The HUF is recognized as a separate legal entity and enjoys tax incentives that are distinct from those available to individual members. By forming an HUF, individuals can legitimately reduce their tax liabilities and optimize their tax outgo. The HUF possesses its own bank account and PAN card, and is required to file its own tax returns. It also has the option to choose between the old and new tax regimes.
One of the main benefits of an HUF is that all the members can pool in their individual assets, which can include gifts from relatives and friends, ancestral property, property acquired from the sale of joint family property, or property contributed by its members. The income generated through these assets is taxed separately at the slab rates applicable to individuals. Additionally, the HUF is entitled to the same exemptions and deductions as individuals, such as those under Section 80C (up to Rs.1.5 lakh), 80D (up to Rs.25,000, and Rs.50,000 for senior citizens), 80DD (up to Rs.1.25 lakh), 80DDB (up to Rs.40,000, and Rs.1 lakh for senior citizens), and 80TTA (up to Rs.10,000, and Rs.50,000 for seniors).
It also benefits from the basic tax exemption of Rs.2.5 lakh. Additionally, owning a residential property under an HUF does not incur any tax liabilities. In the case of an individual owning multiple properties, taxes on the notional rent of the second property can be avoided by transferring it to the HUF. Moreover, an HUF can obtain a home loan to purchase a residential property and enjoy tax benefits on the principal amount repaid (up to Rs.1.5 lakh under Section 80C) and the interest paid on the loan (up to Rs.2 lakh).
Furthermore, certain incomes are exempt from taxation when it comes to HUFs. These include self-acquired property converted or transferred to family property without adequate consideration, income from impartible estates (taxable in the hands of the estate holder rather than the HUF), personal incomes of members (not treated as HUF income), Streedhan (considered the absolute property of a woman with no tax on income arising from it), and income from individual property of a daughter, even if vested in the HUF.
While forming an HUF offers significant tax advantages, it is important to consider its drawbacks. One major disadvantage is that all the assets within the HUF belong to all the members, and therefore, require consent from all members for any sale. Another challenge is the difficulty in dissolving the HUF unless all family members agree to a partition. Even after dissolution, the distribution of assets among members can lead to disputes and legal complications.
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