Income Tax benefits which an HUF can claim

Income Tax benefits which an HUF can claim

HUF is treated as a separate tax entity under the income tax laws and enjoys certain tax benefits under the Income Tax Act.  Let us discuss.

In respect of income

As the HUF is treated as a separate tax entity, it enjoys a separate basic tax exemption of Rs. 2.50 lakhs of its own in addition to the one available to its members. Each and every HUF can claim this basic exemption irrespective  of its residential status for tax purposes. It can also make investments in its own name in various financial assets as well as non financial asset assets like house property, shares, mutual funds etc.  Since HUF can own assets in its own name, it can claim the basic deduction of one lakh rupees available under Section 112A for long term capital gains on sale of listed equity share and units of equity oriented units of mutual funds. This benefit is available from the current year. Earlier such long term capital gains were fully exempt under Section 10(38). Likewise an HUF can carry on business of its own to generate its income.

Tax benefits of Owning of a residential house

An HUF can have a residential house in its own name.  It can also take home loan to acquire/construct  the residential house property and claim the deduction for repayment of the principal component of home loan under Section 80 C upto Rs. 1.50 lakhs along with other eligible items.

As per existing laws a taxpayer can own as many houses as it wants but can only have one self occupied property. For such  self occupied house property the taxable value for income tax purposes is taken as Nil. So in case the HUF owns and uses more than one houses as residence of its members, it has to chose one of the property as self occupied and the rest are treated as deemed to have been let out. In respect of deemed let out property/ies, the HUF is required to offer the market rent as income for tax.    So you can enjoy one additional property for the purpose of occupation of the members, in the name of the HUF instead of having it in your name and having to pay tax on the market rent.

An individual as well as an HUF can claim exemption from long term capital gains arising from sale of any asset other than a residential house under Section 54F if it invests the sale consideration in one residential house property in India, within specified period. However, this exemption is not available if the taxpayer owns more than one house other than the one being purchased. So in order to avoid applicability of this restriction, you can have the additional house in the name of an HUF.

Benefits for payment, expenses and investments

An HUF, Like an individual, can claim tax benefits for certain payments/investments made. For example an HUF can pay life insurance premium for its members and claim deduction u/s 80 C.  So if limit of Section 80 C of Rs. 1.50 lakhs gets exhausted in your case, the life insurance premium on the life of any member of HUF can be paid from the HUF account and the benefit can be claimed instead of it getting wasted.

Even though HUF cannot open a PPF account in its name, it is allowed to claim the deduction in respect of contribution made in the PPF account of its members, under Section 80 C. An HUF is also entitled invest in the popular tax saving instrument Equity Linked Saving Schemes (ELSS)

Due to double digit inflation of medical treatment, the premiums of health insurance are going to the roof and even with the present limit of Rs. 25,000/- under Section 80D one is not able to buy sufficient health insurance for its family. If you have an HUF, you can salvage the situation by paying the extra premium from your HUF and claim the tax benefits in HUF separately upto Rs. 25,000/-. For a senior citizen member the HUF can claim the deduction upto Rs. 50,000/-.

It is not that HUF can claim the tax benefit in respect of all the items for which an individual is entitled. Like an HUF cannot claim tax benefits for tuition fee paid for any of its members or deposit made under Senior Citizen Saving Scheme(SCSS) or any contribution made towards National Pension System (NPS) account or any pension plan for any of its members.

For a resident HUF you can claim tax benefits under Section 80 DD for medical treatment expenses incurred or for life insurance premium paid  for any of its physically disabled member for Rs. 75,000/-. If the members is suffering from severe disability, the available deduction goes to Rs. 1,75,000/-. This deduction is available irrespective of the amount spent by the HUF.

Likewise a resident HUF can also claim deduction upto Rs. 40,000/- for expenses incurred for treatment of some specified disease for any of its dependent member under section 80 DDB. For senior citizen this deduction goes up to Rs. 1 lakh.

Balwant Jain is a tax and investment expert and can be reached at jainbawant@gmail on email and @jainbalwant on twitter.

 

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