Nobody likes to pay taxes. It is an extra burden that has to be borne by those who are working day in and day out to keep a shelter above their heads and food on their table. If an individual has some form of earning and that earning exceeds a particular yearly amount as per the income tax slabs stipulated in the Income Tax Act, he or she is required to pay a certain amount of income tax. This taxation charge is an obligation that must be paid to the government. The amount of tax that is payable depends on the amount of yearly income an individual makes. Different people have different amounts of income. So, if there were to be a single taxation amount, then it would be unfair to those who are scattered on the extreme high and low ends of the income scale. People, who have a relatively high amount of yearly income, have to pay a higher amount of income tax as compared to those who are a lower income.
Fortunately, there are many ways by which one can reap the benefit of tax deductions and be able to save on tax payments. There are many ways by which one can save up on tax. By incorporating and participating in these different ways, one can find themselves being exempted from pay and at other time can enjoy the benefit of having tax deductions on their earnings. One such tax saving tool is HUF or Hindu Undivided Family.
What is a HUF ?
A HUF or Hindu Undivided Family is one of the best ways to save tax and enjoy almost the entirety of your income and earnings. By creating a family and pooling in the assets, one can form a HUF. Normally, in a family, each individual is taxed separately. This causes each and every member of the family to bear their own respective tax burdens, and that collectively adds up to a lump sum amount that goes on for income tax payments. In a Hindu undivided family, instead of each member of the family being separately acknowledged and each is made to be liable to tax payments, a HUF is seen as a singular body. This means that rather than seeing each individual as a part of the family, a HUF is seen as a sole individual and as one. Thus, the members of a HUF are taxed separately from the HUF.
A family of Hindus can come together and from a HUF but there is no hard and fast rule that states that only Hindus or people from a particular religious background can form a HUF. People and individuals who are Sikhs, Jains and Buddhists can also easily form a HUF. Being seen as separate from its members, a HUF has its own PAN card and files tax returns independent from its tenants.
A HUF is generally automatically formed when a man and woman get married and start a family. It is not required that to form a HUF a married couple must have children. The day a groom and the bride get married, the essentially form a HUF. Even though a HUF is automatically created, it is always advisable and beneficial to chalk up a HUF deed or written agreement. This proves to be very beneficial for if and when a Bank or the Income Tax department may ask you to produce a HUF deed. Having a HUF deed also helps in saving up on taxes and makes the process simpler and more convenient. Essentially a HUF can be created in three simple steps:
- The first step would be the creation of a HUF deed. A HUF deed is a simple written document on an official stamp paper which states the names of the eldest person of the HUF and its corresponding members. The eldest member is called the Karta of the HUF.
- The next step is to apply for a PAN card in the name of the HUF. Since a HUF is seen as a separate entity from its members, it is required to apply for a PAN card of its own. This application is made by filing from 49 A which can be acquired both manually as well as online.
- The final step is to open a bank account in the name of the HUF. By opening a bank account for the HUF, the members of the HUF can pool in their assets and deposit part of their earning into it. Being a single entity, the number of taxations on it will be substantially low as compared to the individual members of the HUF.
Once all three steps are completed, the HUF becomes a separate legal entity and can begin receiving payments. The payments received by the HUF will not be taxed by the hands its members and will not be burdened by the tax rates of multiple members of the family but be considered as one singular entity.
Having a HUF is a complete risk-free endeavor and can help in securing the hard-earned income of its members. The income tax payable that would have gone if the members were individually bearing their taxes will substantially decrease. Having a HUF would allow its members to create a larger pool of monetary back p which in turn could be used by the members to satisfy needs and spend it off long and short-term aims like vocational planning or child education. A HUF can be used to also create a large amount of wealth for investment purposes or better financial strength after retirement.
Save tax by HUF
It is a known fact that every member of a family enjoys a certain amount of tax deduction up to rupees one lakh owing to Section 80 C of the Income Tax Act. For those who actively search for the best ways to save tax, a HUF is a fine and beneficial way to lower the amount of income tax that is payable.
If a HUF is created, then it is possible for the creator of the HUF to claim even higher tax deductions under the Income Tax Act 1961 as this act sees a HUF as a separate entity from its members.
Also, for such a HUF, the long-term capital gains and also the dividend income will be exempted from taxation for it goes on the list of securities of the HUF. The income for a short-term capital gain for an undivided Hindu family is also lowered to a mere 15 % tax.
Using the formation of a HUFD is most definitely one of the best ways to save taxes for all of its constituting members. The most advantageous aspect of a HUF is that a HUF can fully be entitled to many of the scattered tax exemption and deduction policies in the Income Tax Act which cannot be fully be enjoyed by a single individual alone. By knowing the advantages brought by the formation of a HUF, people can reduce the amount of tax that is payable by them individually.
Just as an individual can enjoy various tax deductions and exemption on investments made by him or her, a HUF, under the Income Tax Act can also be liable to such amenities. To enjoy such deductions on investments, a HUF can take out a life insurance policy in the name of its consisting members and can pay the premiums which will then allow the HUF to get benefits of tax deduction on the life insurance policy as per the Income Tax Act.
The opening of a PPF account I the name of a HUF was previously possible, but now it is not so. Yet, to claim tax benefits on a PFF, the HUF can contribute to PFF accounts of its members to avail tax deductions under Section 80 C.
It can be safely said that if you are searching for ways in which you can save up on taxes and make the most of exemption and tax deduction clauses stipulated in the Income Tax Act, then forming or being a part of an undivided Hindu family is one of the best ways to save tax. It is a simple and easy method which is naturally formed when there is wedlock between two individuals. By simply having the appropriate documents and authenticating identity proofs like a PAN card and bank account, anyone can reap the benefits of having a HUF and can very easily start saving up on taxes. For a HUF there is no need for officials, and also there is not investment be done. It is something that can be nurtured and formulated from the roots of a family and can greatly help create a large pool of money. This money can be then in turn used to gain financial stability and achieve long and short-term goals.
Among the various types of tax saving tools and clauses, a HUF is by far the most simplistic and risk-free method for tax saving.
