What are the HUF Income Tax Benefits?

The advent of the concept of HUF came into existence in the year 1917. Since then HUF has been given recognition as a single entity for taxation purposes. It has developed its identity as a unique business type that can save taxes in various ways. It will help with tax liabilities and also benefit the future members of the family.

In the following article, we will look into the different ways that a HUF can avail of tax exemptions and HUF tax benefits.

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What Are the Tax Benefits Related to HUF?

The various tax advantages that a HUF can take leverage of as per section 80C for HUF accounts are as follows:

Income Tax: HUF benefits in income tax entails receiving an additional exemption from paying taxes. Besides the tax exemption facility, you may take it individually, as a HUF single entity you will be liable to be exempt from taxes of 2.5 lakh INR per year.
House Ownership: An HUF has the right to own a self-occupied property or a house in this case without paying any taxes on it. Additionally, a HUF can also apply for a home loan on the property and get tax benefits of around 1.5 - 2 lakh INR.
Investments: A HUF can enjoy tax benefits of up to 1.5 lakh INR for investing in ELSS and fixed deposit accounts. Besides that, being a single entity, a HUF can take profits in tax deductions from a member's PPF account.
Health Insurance: Apart from availing deductions on health insurance premiums of up to 25,000 INR, a HUF has the right to additional tax benefits of another 25,000 INR in the respective year. Moreover, if there is a senior individual the amount can rise to 50,000 INR as well.
Life insurance: On life insurance policies of the members of a HUF, a HUF has the right to claim tax benefits of up to 1.5 lakh INR.

Different Ways to Reduce Tax Outgo With a HUF

The various ways to reduce tax outgo with the help of a HUF are the following:

Rental Income: This can be done by receiving income from renting out your property as a HUF. The same cannot be availed as a single individual or in the bank account of a member alone.
Member’s Loan: Members of a HUF can get sanctions on loans when the business of a HUF is seen to be blooming. Expansions of the business can be done by extending loans to the members of the HUF. The interest on these loans depends on the HUF alone.
Family Arrangement: It means that a HUF has control in settling disputes over property or fund sharing so that there exists no need to pay taxes for property transfers, gift taxes, and others. When done in the right way tax exemptions can become completely nil, and if need be get a tax reduction to a larger extent than you cannot get in any other taxation sector.
Business Income: Profits that a HUF acquires from its businesses can be exempted from taxes. This will allow an added advantage in tax savings by a HUF.

While there are multiple benefits of HUF in income tax as you read above, in the following section, we will look at some of its disadvantages.

What Are the Tax Disadvantages Related to HUF?

The various tax disadvantages that you may encounter related to Hindu undivided family tax are as follows:

Account Corpus: An empty corpus means a non-functional account. This can happen in times when there is a sense of insecurity among the members of the HUF. If this stretches over a long period, it can result in not opening the account. Hence, leading to failure to acquire some of the benefits of taxation as a HUF entity.
Partition Process: The partition process is very tedious and long. Here, the major issue is disagreements among the members of the HUF in accepting their proportionate assets division of the HUF account.
Selling Property: To sell a property HUF will require the agreement of all the members. Firstly, everyone may not agree at the same time, and having a big HUF can lead to things becoming more chaotic to come to agreeable terms in selling a property.
Joint-Family Agreement: Nowadays, the concept of joint family as a reality is subsiding, as more and more nuclear families are emerging. Many people are not even aware of the deductions that they can get in income tax if they opt for a HUF. This is a rising concern with the increase in divorce rates, whereas the option of using HUF as a tax-saving entity is taking a backseat.

Hence, by knowing the different HUF tax benefits, one can save a subsequent portion of their profit legally, without looking for tax evasion.

FAQs About HUF Tax Benefits and Drawbacks

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Can adopted children be a part of HUF tax benefits?

Yes, an adopted child can also be part of the HUF. Hence, have the right to Hindu undivided family tax benefits.

What are the two major conditions to claim a HUF status?

To claim a HUF status the following guidelines apply:

Be a resident of India where the control and monitoring of the majority of the business is wholly or partially in the country.
In the immediate time preceding the concerning year, if the Karta of the HUF is living in India for 730 days or more.

What is the major disadvantage of a HUF?

The major or the primary disadvantage of a HUF is closing a HUF bank account is tougher than opening an account.