By forming a Hindu Undivided Family (HUF), assessees belonging to Hindu, Jain, Buddhist and Sikh families may save taxes by diverting their unearned and investment incomes through the organisation.
Dr. Suresh Surana, Founder, RSM India, lists the following investments, which may be diverted through HUF and taxes may be saved on the earnings generated through such investments:
Immovable Assets
Similar to an Individual, HUF is eligible to invest in both movable as well as immovable assets. Thus, out of the income of an HUF, it can invest in both immovable properties such as land, building, house property, etc. Where an HUF makes an investment in a house property, the HUF can claim the benefit of NIL Annual value up to two such houses wherein no tax liability would be incurred.
However, any additional house property owned would be treated as ‘Deemed to be let out’ and subjected to tax. HUF may also claim tax deduction for interest on house loan u/s 24(b) of the Income Tax Act, 1961 (hereinafter referred to as ‘the IT Act’) as well as principal payment u/s 80C of the IT Act.
Financial Assets
An HUF may also invest in movable properties such as shares, bonds, mutual fund, NSCs, Kissan Vikas Patra etc. Such investments would also be separately eligible for tax benefits provided the same is covered within the ambit of the relevant provisions of the IT Act as HUF has a PAN separate from its members.
For instance, Investment in NSC, Equity Linked Savings Scheme (ELSS) – subject to 3 years lock in period, Fixed Deposits subject to 5 years lock in, etc. can be claimed as tax deduction by an HUF u/s 80C of the IT Act subject to the threshold limit of Rs 1.5 lakh.
Insurance
Apart from the above, HUF can avail life insurance as well as health insurance policies on the life of its members and would be eligible for tax deduction provided the payment for the premium on such policies is made by the HUF and accordingly claim tax deduction u/s 80C and 80D of the IT Act respectively.