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10 Tax benefits of having an HUF
HUF is a separate entity for income tax law. Its income is taxable at the same rate as individuals.
It can also avail all the available deductions and exemptions that can be used to offset the tax payments on its income.
In short, it can be used to reduce tax outgo through the division of income between multiple assessable units. Some of the advantages are listed below:
- An income of up to Rs 2,50,000/- earned by the HUF is tax-free as per the tax slabs for the Assessment Year 2020-21.
- A HUF can be used to carry out any business separate from its individual members and thus, can be used to offset the tax liability which would arise in the case of a single joint business.
- Deductions under Section 80C can be claimed by the HUF. For example, a HUF can take insurance policy in the name of its members and make payments of the insurance premium which can be claimed under Section 80C. A HUF can also contribute to the PPF accounts of its members and claim the contribution as a deduction under Section 80C. A HUF can also open five-year duration tax saver Fixed Deposits with banks or invest in Equity Linked Saving Schemes (ELSS) and can claim the investment as a deduction under Section 80C.
- A HUF can also claim deductions on donations made to various charitable organizations under Section 80G.
- Under Section 80D, the HUF can also claim a tax deduction of the health insurance premium paid for health insurance policy taken in the name of its members. Section 80DD deductions for maintenance of HUF member(s) with disability and Section 80DDB deductions for payments on medical treatment of specified diseases are also available.
- A HUF can make investments from its income in any instrument and the income arising from such investments will be taxable in the hands of the HUF along with all the concerned taxation benefits. For example, if a HUF makes Long Term Capital Gains (LTCG) of up to Rs 1,00,000/- on its equity investments in a year, the said income will be exempt from tax.
- If a member of the HUF receives House Rent Allowance (HRA) from his/her employer and resides in the joint property owned by the HUF, he/she can pay rent to the HUF and subsequently claim deduction on the HRA received.
- A HUF can pay a salary to its members for contributing to the functioning of the HUF which can then be claimed as a deductible expense from its income. However, there must be some justifiable contribution to the salary earning members to the working of the HUF & management of its affairs.
- A HUF can also claim deduction on interest paid on house property of up to Rs. 2,00,000/- in a year. However, the house property must be in the name of the HUF or jointly in the name of the HUF and one of its members. The principal repayments can be claimed as deduction under Section 80C. The house property can either be self-occupied or rented out. The rental income from a rented-out property in the name of the HUF is taxed only in the hands of the HUF and therefore, can be used to reduce the tax liability against a situation where the house property is in the name of an individual member.
- Since the income after tax of the HUF is the family’s income, the Karta can use it for family expenses and can also distribute it among the members without any further tax liability.