I receive many emails from readers asking about the tax benefits available to an HUF under the current tax laws. Let us discuss
Separate tax entity for income tax purposes
An HUF is treated as a separate tax entity under the income tax laws and thus enjoys a separate basic tax exemption of Rs. 2.50 lakhs under the old tax regime. Under the new tax regime, the basic exemption limit available is higher at 4 lakhs. As HUF is treated as a separate legal entity, it can make investments in its own name in various assets like a house, shares, mutual funds, etc.
Since an HUF can own and transact in shares and securities in its own name, it can also avail the benefit of tax-free long-term capital gains of ₹1.25 lakh earned on listed shares and equity-oriented mutual funds as provided under Section 112A of the Income Tax Act.
In addition to making investments in various assets, an HUF can also own and run a business in its own name with its own capital or with money borrowed from anyone, including its members.
Benefits of owning a residential house in the name of an HUF
As an HUF can own immovable property in its own name, including a residential house, it can also obtain a home loan. Like an Individual, an HUF is also entitled to claim tax benefits attached to a home loan. The benefits would differ depending on which tax regime you opt for.
On a home loan taken for a residential house, it can avail a deduction under Section 80C for repayment of the principal amount upto one lakh and fifty thousand rupees with other eligible items under the old tax regime.
In respect of interest on money borrowed for acquiring a house, HUF can claim tax benefits under Section 24(b) under the old tax regime for let out and self-occupied property, subject to a cap of Rs. 2 lakhs upto which loss under house property head can be set off against other incomes during the same year.
If you opt for the new tax regime, the tax benefits for interest on a home loan are available for let-out properties to the extent of taxable rent, as loss under the house property is not allowed to be set off against other income under the new tax regime. No tax benefit is available in respect of self-occupied properties for interest paid.
Present tax laws allow you to have only two house properties as self-occupied and treat other self-occupied properties as deemed to have been let out in case you own and occupy more than two houses for self-occupation. For two self-occupied properties, the income to be offered for tax is nil, but for the house/s treated as deemed to have been let out, you have to offer notional rent at the market rate for tax, even when you have not received any rentals from such property.
So, in case the house property is acquired in the name of your HUF, you can have two additional houses as self-occupied properties with nil income and thus save tax on this account, where you need to have more than two houses for self-occupation.
Under Section 54F of the Income Tax Act, an individual or HUF can claim exemption in respect of long-term capital gains arising from the sale of any asset other than a residential house if the net sale proceeds are invested for acquiring or constructing a residential house within the prescribed time period.
This exemption can only be claimed if the individual or the HUF does not own more than one residential house, except the house which is being acquired on the date of sale of the asset. So if a residential house is purchased in the name of an HUF, the tax benefits can be availed under Section 54F while having more than one house in the family, including the one owned by the HUF.
Tax benefits for investments under the old tax regime
Like an individual HUF can also claim tax benefits in respect of certain payments made under the old tax regime. For example, an HUF can pay a premium on a life insurance policy on the life of any of its members and avail a deduction under Section 80C. This comes in handy when the limit of one lakh fifty thousand rupees gets exhausted for individuals due to various mandatory items like school fees, employee provident fund contribution, repayment of home loan, etc.
Though HUF cannot open a PPF account but it can still contribute to the PPF account of its members and avail the tax benefit. The HUF can also invest in Equity Linked Saving Schemes and tax-saving fixed deposits.
An individual can claim tax benefits for health insurance premiums paid for his family upto twenty-five thousand rupees. Looking at the health insurance premium rates, even the present limit of twenty-five thousand rupees is insufficient for the entire family.
In such a situation, your HUF can come to your help by paying premiums for some of the members and optimising the tax benefits. If the HUF has a senior citizen member, the deduction can go upto fifty thousand rupees.
It is not that an HUF can claim a deduction under Section 80C for all the items for which an individual is entitled to. An HUF cannot claim tax benefits for tuition fee paid for its members or deposits made under the Senior Citizen Saving Scheme, or contributions made to the National Pension System (NPS) account or pension plan, or for National Saving Certificates
A deduction for a physically disabled member is available for seventy-five thousand rupees to an HUF if the HUF has spent any amount for the treatment of such a member or it has paid a premium for a life insurance policy purchased for the maintenance of such a member. For a member suffering from a severe disability, the amount of deduction available goes up to one lakh twenty-five thousand rupees. This is a flat deduction irrespective of the amount spent.
A resident HUF is also entitled to a deduction under Section 80 DDB for treatment of any of its dependent members for some specified diseases. The maximum amount of deduction is restricted to forty thousand rupees normally, but goes up to one lakh rupees if such a member is a senior citizen.
Balwant Jain is a tax and investment expert and can be reached at ja*********@***il.com and @jainbalwant on his Twitter handle.
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