Hindu Undivided Family (HUF) is known to be a very good tax saving tool in India in an ethical & compliant way.
#1. Who can form an HUF & how is it taxed under the Income Tax Act :-
Ans:- Formation of HUF:
•HUF can be created by Hindus only but even Buddhists, Jains, and Sikhs can also form an HUF.
•HUF means consists of an ancestor, all of his lineal descendants including their wives & daughters but not the spouses of daughters.
•The senior most member of the family is called the KARTA of HUF.
•All the members of the family can be the member of the HUF.
•An HUF should have a legal deed explaining details of HUF members & its business of the HUF.
HUF may get its assets from its members through gift, will, ancestral properties or contribution by any member to the common pool of HUF.
#2.Taxation of HUF:-
•HUF is an independent assessee under the Income Tax Act & hence taxed separately from its members, hence it has its own PAN and files its ITR separately.
•Like individuals HUF’s also get the benefit of minimum exemption limit & slab wise tax rate along with deductions like Section 80C, sec 54, 54F etc.
•HUF can take an insurance policy for its members & claim the deduction under section 80C.
•HUF can pay salary/remuneration to its members & can claim the same as an legitimate expense.
•Income from investment made by HUF would be taxed in the hands of HUF only.
•The tax saving by creating the HUF is achieved by transferring of assets to the common pool of HUF and then getting the income taxed in the hand of HUF.