Hindu Undivided Family (HUF): A Smart Way to Save Income Tax

Proper tax planning is a must whenever it comes to financial investing, ensuring that you maximize your returns as much as possible while lowering tax liabilities. A HUF (Hindu Undivided Family) is a legitimate and smart way to create a separate and independent tax entity that can potentially help you save taxes and enable efficient accumulation and management of family wealth simultaneously.

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What is a Hindu Undivided Family (HUF)?

A HUF (Hindu Undivided Family) is a unique entity where family members can come together and pool their resources to form it. The eldest male member is referred to as the Karta who is the head of the entity which may own ancestral assets, properties, proceeds acquired from the sale of joint family property, and other shared assets/investments. HUFs have a separate unique PAN number and are required to file tax returns independently of the individual members. This is because a HUF is treated as a separate legal entity for taxation purposes and has dedicated bank accounts. 

Also Read : What is HUF & Benefits?

Who Can Form a HUF and Why Investors Should Consider It

A HUF may be formed by any/all family members as there is no individual ownership. They may be formed by two members where at least one should be a male member. The Karta is the signatory authority and manages the family investments and wealth on behalf of the coparceners.

A HUF is formed with the execution of a deed, obtaining the PAN, and then opening a dedicated bank account. The documents required include the PAN card of the HUF and Karta, KYC documents of the HUF and Karta, HUF declaration, and more. 

HUFs enable optimization of tax benefits for investors, since they get capital gains exemptions under Sections 54 and 54F, and are also taxed separately from individual income. This could help lower tax liabilities.

The income tax slab for the HUF is the same as the individual, thereby enabling tax exemption limits and eligibility for all other deductions/benefits. It also enables smooth management of family assets and shared properties/investments in a hassle-free manner. 

Read More : Demat Account for HUF - A Beginner's Guide

Tax Benefits of Using HUF for Financial Investments

Investing as a HUF has several tax benefits. Since they have a separate PAN, they are required to file tax returns independently. They also have the same income tax slabs as individuals, which means they are eligible for all benefits and deductions under Sections 80C, 80D, 80G, and more.

There is also the exemption limit up to ₹2.5 lakh that a HUF will get, in tandem with capital gains exemptions under Sections 54 and 54F. 

Gifts collected up to ₹50,000 will also be tax-free while the corpus may also be used for investments in tax-free instruments. Fathers with HUF accounts may gift properties/money of higher worth to sons owning smaller HUF accounts, although it should be specified as a gift for the latter’s HUF and not the individual. This may offer tax benefits under Sections 56(2) and 64(2).

Thus, a HUF helps in diversifying and splitting taxable income among family members, while offering tax arbitrage opportunities with LTCG and dividend taxes coming into play. You can all spread out taxes under the HUF entity and lower personal tax liabilities potentially in the bargain. 

Also Read : Difference Between Individual and HUF Demat Accounts

Investing as a HUF

Here are some of the best investment avenues that can be done through a HUF: 

• Mutual Funds
  HUFs may invest in mutual funds either through SIPs (systematic investment plans) or a lump sum amount. Family members may choose equity or debt funds or a combination of both to build up a portfolio that earns steady returns. 
• Stocks
  HUFs can also consider investing in shares of various companies or trading through demat accounts in their name. 
• Fixed Deposits & Bonds
  To diversify the portfolio and minimize risks, HUFs may spread out investments across various Government and highly-rated corporate bonds along with FDs that assure guaranteed returns. 
• REITs or InvITs
  For earning passive income that is tax-efficient and steady, a HUF may deploy capital into Real Estate Investment Trusts or REITs to capitalize on the commercial real estate boom in the country. Another option is InvITs or infrastructure investment trusts which operate in a similar manner. 
• Gold ETFs & Digital Gold
  Gold ETFs could be an option for hedging against future uncertainty along with digital gold investments across reputable platforms. 

Read More : How to Open a Demat Account for Partnership Firms & Required Documents?

Tax Filing and Compliance for HUF Investments

Tax filing can be done under ITR-2 in case the HUF does not have income under the head Profits and Gains of Business or Profession. Otherwise, ITR-3 will have to be filed by the HUF, depending on the income type. The capital gains need to be reported for your mutual funds and equity investments while filing taxes, along with furnishing all proof of investments and income segregation. The HUF has to keep in mind to avoid clubbing its income with that of individual members. 

Conclusion

A HUF is an underrated but highly powerful tool for tax-efficient investing and a legally smart way to build family wealth for the long haul, while managing shared assets smoothly. If done right, it can help all family members with legacy planning and potentially lowering their individual tax liabilities in the bargain.