Summary of this article
HUF offers separate tax treatment for property income.
Home loan and capital gains benefits available.
Helps preserve family wealth and succession planning.
A Hindu Undivided Family (HUF) is a unique legal and tax entity that is recognised by Indian laws. Under this, members of Hindu, Sikh, Jain and Buddhist families are allowed to manage and own assets as an entity rather than just a singular person’s ownership. While HUFs are commonly used and relied on for tax planning and wealth management, they are also an effective tool for real estate investments. By purchasing and managing property through HUF, people can optimise taxes, inheritance, and long-term wealth.
What is an HUF
An HUF consists of all persons lineally descended from a common ancestor, which includes their spouses and unmarried daughters. It is created automatically in a Hindu family, although a separate Permanent Account Number (PAN) and bank account are required for it to function as a separate tax body. The senior-most member of the family acts as the karta and manages the affairs of the HUF on behalf of the other members, who are called coparceners. Following the amendments to Hindu succession laws, daughters now enjoy the same rights as the male members of the HUF.
How HUFs Benefit in Real Estate Investments
An HUF offers various advantages to the buyers under the Income-tax Act, 1961. This helps in saving money through special concessions under HUF.
Separate Tax Liability: If one is earning rental income through their property, that income is taxed in the hands of the HUF rather than at the tax slabs of the individuals. Since HUF enjoys the same basic exemption limit, families may reduce their overall tax burden by distributing assets among members of the family.
Additional Home Loan Tax Benefits: If an HUF entity takes a home loan to buy a property, it can claim deductions under applicable provisions of the Income-tax Act, 1961. Interest paid on a housing loan for a property that is rented out can also be claimed while computing the income earned from the housing property.
Preservation of Wealth: An HUF enables the family members to pool in financially and invest in larger and valuable properties. This is useful for families who wish to build a common real estate portfolio to generate rental income.
Structured Succession: Properties that are owned by HUF families are secure from disputes and legal battles. HUF reduces the disputes related to inheritance, as ownership belongs to the entity and not to a single member. Thus, succession is smoother than with individually owned assets.
Key Tax Provisions and Clauses
HUF provides several tax-saving incentives to families who have HUF-owners real estate.
Under Section 80C, an HUF can claim deductions up to a set limit for repayment of the home loan taken for a residential property.
Under Section 24(b), interest paid on a home loan can be claimed as a deduction against income from house property. This is subject to limits and conditions.
Under Section 54 and Section 54F, HUFs can avail of capital gains tax exemptions.
Under Section 10(2), distribution of income from an HUF to its members is generally exempt from tax in the hands of the recipients, since the income has already been taxed at the HUF level.
Says Ravikant, co-founder, Elegance Infra and Enterprises: “An HUF can avail of deductions and exemptions under Sections 54 and 54F of the Income-tax Act, 1961, provided it meets certain specific conditions. Regarding capital gains tax on the property owned by HUF, it follows the same pattern as for any individual, but due to an HUF’s independent tax status, it allows for better scope of planning. Even where an HUF owns more than one residential property, the tax benefit will depend on the provisions rather than the number of properties owned by it. The most common myth regarding the tax benefits of an HUF property is that creating an HUF will help it get tax benefits. Actually, whether tax benefits are available or not depends on statutory requirements, transaction and documentation, among others.”
HUF acts as a good option for families who wish to build wealth and have no problem sharing their portfolio. However, the benefits must be weighed against the administrative and legal complexities involved in this model.
