HUF account rules are similar to savings accounts. But before going into depth about the HUF account rules, let’s understand what is a HUF.
What is HUF?
HUF is a Hindu Undivided Family. It simply means a family of Hindus. HUF is a family that has a common ancestor with all his legal male successors, with their wives and unmarried daughters. It is a family joint in estate, food and worship.
There are some essential criteria to fulfil before forming a HUF:
- Firstly, only one member or co-parcener cannot form a HUF.
- Secondly, the joint family continues even in the hands of female members if the sole male member dies.
- Lastly, a HUF does not require two male members. For example, a father and his unmarried daughter can have a HUF.
There are two kinds of people in HUF- the Karta and the other members.
Karta is the manager and the senior-most member of the family. Then, the lineal sons, wives, and unmarried daughters are known as co-parceners. Moreover, Karta is the custodian of the finances, looks after daily affairs, spends and borrows money on behalf of the HUF, and is not liable to anyone. But he cannot enter into contracts without the consent of other members.
HUF helps to optimize tax liabilities and provides benefits to the family members in future. HUF is a separate identity for the sake of income tax. Even though the Hindu Law Board governs it, Jains, Sikhs, and Buddhists can also form HUF. It has separate tax obligations from that of an individual.
However, the tax slabs are the same as an individual and they also receive tax benefits under section 80. It also receives tax exemptions under section 54 for capital gains.
HUF Account Rules
One should keep in mind the legal financial requirements before starting a HUF. HUF must have a legal deed that contains details of HUF members and the business. It also requires having a PAN number, bank account, and Demat account, in the name of the HUF. But it is directly linked to Karta’s identity.
A few thousand rupees are required to form a HUF. Then, one needs to infuse capital in the form of assets or gifts received under inheritance or will or from relatives. These assets are exempt from tax. Hence, one should not transfer personal assets to a HUF account.
HUF account has a corpus where all family members keep their income. The Karta is responsible to handle the account. Karta’s signature is necessary for every bank transaction. The accounts are similar to an individual savings account. But some tax benefits are available for an individual’s account while one pool the income of members in the HUF account.
Now, there are some HUF account rules which are different from a regular savings account:
- Firstly, every individual can deposit money in the common HUF account.
- Secondly, Karta has the authority to maintain the account while other members can participate in depositing amounts.
- Then, the HUF account provides tax benefits on the amount deposited.
- Lastly, the corpus gets divided on the agreement of every coparcener.
Documents required to open a HUF account
- Firstly, HUF will have its PAN card. Hence, one requires a PAN card of the HUF along with Karta’s PAN.
- Then, Karta will have sole authority over the HUF account
- Further, a declaration form will have the signatures of all the members and Karta.
- Moreover, Karta should govern all the transactions made by the members on his behalf.
- Then, identification and residential proof of Karta.
- Lastly, other documents related to the HUF account might be asked depending on the bank.
HUF Account Benefits and Drawbacks
Deductions under section 80 are available for the HUF account. Also, the gifts received as capital up to ₹50,000 will be exempt from tax. For instance, a father gifts his son ₹50,000 who owns a small HUF account. To avail of tax benefits, the father must specify that the money was for the son’s HUF and not to him as an individual. Lastly, one can use the corpus in the HUF account to invest in tax-free investments.
But there are some disadvantages too. The conflicts or insecurity among members can keep the account empty which will eventually lead to the closure of the account. If any member demands partition, then the partition of deposits is tedious. Moreover, salaried people cannot have a HUF account and deposit money in it. But the person can avail of tax benefits if he earns additional income under the name of HUF.
For example, an individual receives a salary of 10 lakhs and earns 5 lakhs from the business. If he has a HUF business with an account, then the total income is taxable under HUF. Therefore, he can reduce his tax liability.
HUF Income Tax Benefits
- In the eyes of law, HUF has a separate legal entity. It has its PAN number. Since HUF is a separate identity, it can claim tax exemptions and income deductions too. Hence, one can get tax benefits individually and also from the additional income received from the HUF business.
- Under income tax laws, if a person has more than two self-occupied properties, then they are considered as deemed let out properties on which net annual value gets calculated and tax is payable. But if HUF has its residential property, then it is not taxable. Additionally, they can also avail of a home loan and get benefits under section 80C.
- Moreover, HUF can pay the life insurance premium on behalf of the members and can claim tax benefits under section 80C. The maximum income allowed as a deduction is 1.5 lakhs.
- HUF can also make investments in tax-saving fixed deposits, ELSS, and other tax-saving instruments.
- Lastly, one can claim a deduction of up to ₹25,000 on medical insurance paid under section 80D. However, with the rise in insurance premiums the limit is insufficient. But in the case of HUF, one can avail of an additional deduction of up to ₹25,000 on health insurance premiums paid during the year. Moreover, if the person is a senior citizen, then he can avail tax benefits up to ₹50,000.