Why HUF may not be effective tool for tax planning

CA Brijmohan Lavaniya | Last updated: 12 May 2020

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A Hindu Undivided Family (HUF) is recognised as a separate taxable entity in India, often set up to split income and potentially reduce tax liability through an additional PAN card. However, HUFs have significant disadvantages. All family members have rights to HUF assets, and crucially, HUFs are ineligible for the Section 87A rebate, which is available to individuals. Furthermore, various deductions like those for the handicapped (Section 80U), higher education loan interest (Section 80E), and rent paid (Section 80GG) are not permitted for HUFs.

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.

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

FAQ :

A HUF is treated as a distinct entity for taxation under the Income Tax Act, 1961, and is included in the definition of a 'person' liable to pay income tax.

The primary reason for establishing a HUF is to obtain an extra PAN card and file a separate tax return, allowing for the splitting of family income to potentially reduce overall tax liability.

No, HUFs are not eligible for the tax rebate under Section 87A, even though the rebate limit has been increased for individuals.

HUFs are subject to standard income tax slab rates irrespective of the age of the HUF, similar to individuals.

HUFs are not allowed deductions under Section 80U (for handicapped assessees), Section 80E (interest on higher education loans), Section 80GG (rent paid), and Section 80EE (interest on first home loan).

The head of the family is called the Karta, and other family members are referred to as Co-parceners.

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About the Author

CA Brijmohan Lavaniya

CA and Operations Leader with over 6 years of experience in the tax and finance domain. Currently the Head of Operations and a Founding Team Member at TaxBuddy.com, a leading online platform that provides tax planning and filing services.

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