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Why HUF may not be effective tool for tax planning

CA Brijmohan Lavaniya 
on 12 May 2020

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A Hindu undivided family (HUF) is treated as a separate entity for the purpose of taxation under the income tax act, 1961. It is included in the definition of a person under section 2(31) of the Income-tax act, 1961. Income tax is payable by every person. Therefore, income tax is payable by a HUF.

The Head of the family is called Karta & Other family members are called Co-parceners.

The main reason for creating a Hindu undivided family is that the family gets an extra PAN card & file its separate return by splitting family income and thereby resulting in tax saving & reducing the tax liability. This is why CA’s advise their clients to create a HUF & save the taxes.

However, there are some disadvantages to creating HUF. They are:

  • Right in the Assets: All the Assets in the name of Hindu Undivided Family are assets of the family and not of any single person. All the members of the family have the right to the asset of Hindu Undivided Family.
  • No Benefit of Rebate u/s 87A: From the Financial year 2019-20 the limit of rebate under section 87A is increased from 3,50,000/- to 5,00,000/-. This benefit is not available to HUF.
Why HUF may not be effective tool for tax planning
  • Tax Slab: There is a standard slab rate of income of HUF irrespective of the age of HUF.
   

Sr. No.

Income tax slab

Tax rate

1

Income up to Rs. 2,50,000*

Nil

2

Income from Rs. 2,50,000 – Rs. 5,00,000

5%

3

Income from Rs. 5,00,000 – 10,00,000

20%

4

Income more than Rs. 10,00,000

30%

  • Section 80U: Deduction for Handicapped Assessee if not allowed to HUF under section 80U of the income tax act, 1961.
  • Section 80E: Interest component of repayment of loan taken for Higher Education is not allowed to the HUF under section 80E of the income tax act, 1961.
  • Section 80GG: Deduction of Rent paid is not allowed to HUF under section 80GG of the income tax act, 1961.
  • Section 80EE: Deduction for Interest on loan taken for the purchase of a house for 1st time is not allowed to HUF under section 80EE of the income tax act, 1961.
 
 

The author can also be reached at brijlavaniya@yahoo.com


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