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Hindu Undivided Family (HUF)

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Know all about 80GG Tax benefit on Rent Paid

Know all about 80GG Tax benefit on Rent Paid

House Rent Allowance, or commonly known as HRA, is an amount which is paid by employers to employees as a part of their salaries. This is basically done as it helps provide employees with tax benefits towards the payment for accommodations every year. The decision of how much HRA needs to be paid to the employee is made by the employer on the basis of a number of different criteria such as the salary and the city of residence.

Regulated by the provisions of Section 10(13A) of the IT Act, the house rent allowance serves to be quite beneficial to salaried employees in India. As per law, only salaried employees can claim HRA and self-employed individuals are exempt from doing the same. HRA, as an exemption is provided, only if the employee is living in rented accommodations. However, also in case the employee lives in his or her own house and does not pay any rent, he or she cannot claim HRA to save on taxes.

However, not everyone can avail the benefit of HRA. To provide individuals with benefit w.r.t rent, Section 80GG was introduced. Section 80GG is a special provision under Chapter VI-A of the Income Tax Act, 1961, which provides tax reprieve to those who do not avail house rent allowance.

What deduction is available under Section 80GG?

Section 80GG allows taxpayers to claim the deduction for rent paid for furnished or unfurnished accommodation occupied by the taxpayer for own residence. The claim under Section can only be made in cases where House Rent Allowance (HRA).

In computing the total income of an assessee, the deduction shall be lower of:

  • any expenditure incurred by him in excess of 10% of his adjusted total income towards payment of rent in respect of any furnished or unfurnished accommodation occupied by him for the purposes of his own residence
  • Rs 5000 per month or
  • 25% of his total income for the year

Such deduction shall be subject to such other conditions or limitations as may be prescribed, having regard to the area or place in which such accom­modation is situated and other relevant considerations.

What do you mean adjusted total income?

Adjusted total income refers to income not including long term and short-term capital gains. Here, only those short-term capital gains shall be excluded which are taxed at 10% that is u/s 111A.

Also, adjusted total income refers to income excluding income u/s 115A to 115D and deductions from 80C to 80U.

The adjusted total income = Gross Total Income – Long Term Capital Gain – Short Term Capital Gain subject to tax at 10% – deductions under sections 80C to 80U – income from the foreign company.

Section 80GG shall not be included in the above deductions from 80C to 80U.

When shall Section 80GG not be applicable?

Section 80GG shall not apply to an assessee in any case where any residential accommodation is:

  • owned by the assessee or by his spouse or minor child or, where such assessee is a member of a Hindu undivided family by such family, at the place where he ordinarily resides or performs duties of his office or employment or carries on his business or profes­sion; or
  • owned by the assessee at any other place, being accom­modation in the occupation of the assessee

Who is eligible to claim deduction under Section 80GG?

  • Only individuals and Hindu Undivided Family (HUF) are eligible to claim these tax deductions.
  • Businesses or other enterprises cannot avail the same tax discounts upon paying rent in a given financial year.
  • Individuals who are either salaried professionals or self-employed can take advantage of this provision.
  • If one has no income to speak of, he/she is disqualified from seeking Section 80GG income tax benefits, even if he/she pays the rent.
  • If a person’s salary includes HRA payment, he/she is ineligible to claim income tax rebates related to housing rent.
  • Even if one did not receive HRA for a major portion of the year, acquiring the same for just a month disqualifies his/her from claiming this yearly reprieve.

Can individuals residing with their parents claim deduction under Section 80GG?

  • Individuals residing with their parents in a property owned by their parents are also eligible to claim Section 80GG benefits.
  • However, they are required to sign a rental agreement with his/her parents.
  • Also, the amount shown as rent will be taxable when the parents file their yearly taxes.

Can NRI’s claim deduction under Section 80GG?

Non-resident Indians are also eligible to claim tax benefits under this provision. However, they must be paying rent for a property in India to apply for the same.

What details are required to be provided while claiming deduction under Section 80GG?

Those seeking to avail this tax rebate need to submit a duly filled Form 10BA to the government beforehand. This Form is a declaration that the individual filing it does not claim benefit from a self-occupied property in any location.

The details required to be submitted are:

  • Name of the assessee
  • PAN
  • Full address of the premises along with Postal Code
  • Tenure (in months)
  • Payment Mode
  • Amount Paid
  • Name of landlord
  • address of the landlord.
  • PAN of the landlord is mandatory if rental is more than Rs 1 lakh for the assessment year.
  • A Declaration confirming that no other house property is owned by the taxpayer himself or in the name of Spouse / minor child or by the HUF of which he is a member.
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Is deemed dividend taxable for a person who is not a registered shareholder but a beneficial owner?

Is deemed dividend taxable for a person who is not a registered shareholder but a beneficial owner?

Dividend basically refers to a reward, cash or otherwise, that a company gives to its shareholders. Dividends can be issued in various forms, such as cash payment, stocks or any other form. However, it is not obligatory for a company to pay dividend. Dividend is usually a part of the profit that the company shares with its shareholders. The dividend is the amount received by an investor, whether it’s an individual or HUF, on account of holding shares in a company. In simple words, it is the distribution of profits of the company to its shareholders.

According to Section 2(22)(e) of the Income Tax Act, when a company in which the public are not substantially interested, extends a loan or an advance to:

  • any of its shareholders who has more than 10% voting power in the company or
  • to any concern in which such shareholder is substantially interested or
  • for the individual benefit of such shareholder or
  • on behalf of such shareholder

to the extent the company has accumulated profits, such payment would be deemed as a dividend under Section 2(22)(e).

A company in which public is not substantially interested is otherwise called a closely held company. In case of deemed dividend under section 2(22)(e), the tax is charged at the rate of 30%.

Let us refer to the case of Rameshwar Lal Sanwarmal vs Commissioner Of Income-Tax where the issue under consideration was whether deemed dividend is taxable for a person who is not a registered shareholder but a beneficial owner.

Facts of the Case:

  • The assessee, a Hindu Undivided Family (HUF), owned certain shares in a private limited company in which the public were not substantially interested.
  • Though the shares were beneficially owned by the HUF, they stood registered in the name of its Karta.
  • From out of its accumulated profits the company gave loans to three business concerns which were owned by the assessee.
  • Section 2(6)(e) of the Indian Income Tax Act, 1922 provided that where a private company in which public were not substantially interested gave loans to its shareholders from out of its accumulated profits such loan would be treated as “deemed dividend” in the hands of the shareholders.
  • The Income Tax officer treated the loans as “deemed dividend” in the hands of the assessee on the ground that though the shares stood in the name of the Karta, the assessee being the beneficial owner, the conditions of section 2(6A)-(e) were satisfied.

Proceedings of Appellate Authorities

  • The view of the Income Tax officer was upheld by the Appellate Assistant Commissioner.
  • The Appellate Tribunal rejected the contentions of the assessee that the loans could not be taxed as “deemed dividend” in its hands because it was not the registered owner of the shares
  • Assuming that they could be treated as “deemed dividend” they could be taxed only in the hands of the karta. The Tribunal referred some questions to the High Court.

Observations of the High Court (HC)

  • The High Court held that the loans could not be treated as “deemed dividend” in the assessee’s hands because the term shareholder used in the section meant only a person whose name is recorded in the company’s register of shareholders and even assuming that the loans were “deemed dividend” they could be taxed only in the hands of the registered shareholder (the Karta).
  • The assessment made by the Income Tax officer was accordingly set aside.

Proceedings of the Supreme Court (SC)

  • In appeal to this Court, instead of questioning the correctness of the answers returned by the High Court the Revenue attacked only that part of the High Court’s order which held that “deemed dividend” could be taxed only in the hands of the registered shareholder.
  • Therefore, the question before this Court was whether “deemed dividend” could be taxed in the hands of the beneficial owner of shares or could be brought to tax only in the hands of the registered shareholder.
  • SC answered that where shares are acquired with the funds of one person but are registered in the name of another it is the beneficial owner who should be taxed on the dividend on the shares and that this principle applies equally to “deemed dividend” under the section.
  • Even so, SC discharged the answer given by the HC in favour of the assessee and substituted an answer in favour of the Revenue.

Submissions by both the Parties

  • Placing reliance on the decision of this Court in CIT v. Sarathy Mudaliar where it was held that a loan advanced by a company to a beneficial owner did not fall within the mischief of section 2(6A)(e), the assessee contended that loans in this case could not be taxed as “deemed dividend” in its hands.
  • The Revenue on the other hand contended that since in the earlier case of Rameswarlal Sanwarmal this Court had answered the reference in favour of the Revenue and that decision was final the later decision in Sarathy Mudaliar’s case would not be available to the assessee
  • Although the present question was not specifically considered by this Court on the earlier occasion it must be held to have been impliedly decided against the assessee and that the decision in Sarathy Mudaliar’s case was incorrect and should be referred to a larger bench.

Observations of the SC

  • SC held that arguments of the Revenue were erroneous.
  • When the Revenue came in appeal to the SC in the earlier case of Rameswarlal Sanwarmal it challenged only the second part of the HC’s decision ignoring the first part.
  • The result was that the first part of the HC’s decision that loans advanced to the business concerns of a beneficial owner of shares could not be regarded as ‘deemed dividend” in his hands and that the loans in the sent case did not fall within the meaning of section 2(6A)(e) remained intact and unaffected by the decision of the SC.
  • This Court could not have answered the first question against the assessee without over-ruling the first part of the High Court’s decision.
  • However, SC set aside the High Court’s answer without considering whether this part of tile decision was right or wrong.
  • When no contention was raised on behalf of the Revenue that even if the assessee was not a registered shareholder loans advanced to its business concerns would be “deemed dividend” in its hands and there was no occasion for this Court to consider the question, from the mere fact that an answer was given in favour of the Revenue, it could not be said that this contention was impliedly decided in its favour
  • The proper Way of looking at the decision of this Court in Rameswarlal Sanwarmal would be to regard the answer given in favour of the Revenue to be confined only to the aspect considered and decided by this Court, namely, that “deemed dividend” did not stand on any different tooting from actual dividend and just as actual dividend is liable to be taxed in the hands of the beneficial 6 owner of the shares. so too “deemed dividend” must be held liable to be taxed ill the hands of the beneficial owner.
  • This Court did not consider whether a loan to a beneficial owner could be regarded as “deemed dividend”.
  • Therefore, this aspect of the question still remained to be answered and it was open to the assessee to contend that the loans advanced to its business concerns could not be regarded as “deemed dividend” within the meaning of the section since the assessee was not a! registered shareholder
  • The decision of SC in Sarathy Mudaliar’s case laid down the law correctly and there was no need to refer the case to a larger bench.
  • The question whether a loan advanced to beneficial owner of shares would be liable to be regarded as “deemed dividend” was neither raised nor considered by this Court in Rameswarlal Sanwarmal’s case but came up for consideration for the first time in Sarathy Mudaliar’s case only.
  • There was thus no conflict between the two decisions
  • It was only where a loan was advanced by a company to a registered shareholder the other conditions set out in the section are satisfied that the amount of the loan would be liable to be regarded as “deemed dividend”.
  • The amount of loan would not fall within the section if it is granted to a beneficial owner of the shares.
  • In the instant case the loans were advanced not to the registered shareholder but to the business concerns of the beneficial owner.
  • Hence, they could not be regarded loans advanced to a shareholder of the company within the meaning of the section.
  • SC, thus answered the first question in favour of the assessee

Therefore, when loans are advanced to the beneficial owner of the shares and not to the registered shareholder and hence they could not be regarded as loans advanced to a “shareholder” of the company within the meaning of section 2(6A)(e). Section 2(6A)(e) is accordingly not attracted and the amounts of the loans could not be taxed as deemed dividends in the hands of the assessee.

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How to form a small HUF within a bigger HUF?

How to form a small HUF within a bigger HUF?

Under Hindu Law, a Hindu Undivided Family (HUF) is a family which consists of all persons lineally descended from a common ancestor, and also the wives and daughters of the male descendants. It consists of the Karta, who is typically the eldest person or head of the family, while other family members are coparceners. The Karta manages the day-to-day affairs of the HUF. Children are coparceners of their father’s HUF.

How is a HUF covered under Income Tax Provisions?

Under section 2(31) of the Income-tax Act, 1961, an HUF is considered a “person” and, therefore, is treated as a separate entity for the purpose of tax assessment. Often families that own ancestral properties and businesses obtain a separate Permanent Account Number (PAN) in the name of the HUF. This is done so that the incomes earned from the assets and businesses owned by the HUF are assessed separately, which also brings down the family’s tax liability. An HUF is taxed on the same slab rates that are applicable to an individual income tax assessee.

How is a HUF formed?

A HUF automatically comes into existence when a person gets married and starts his family. It is not necessary that this new family should also have kids. Although a HUF is automatically formed at the time of marriage, it is always advisable to have a written agreement as the Banks and Income Tax Department asks for a HUF Deed. It is not necessary that HUF is created on the day of marriage itself and can be created at any point of time in future.

To create a HUF, the below mentioned steps are required to be followed:

Step 1 – Create HUF Deed

  • The HUF Deed is a written formal document on a Stamp Paper stating the names of the Karta and the Co-parceners (Members) of the HUF. The eldest male member of the HUF becomes the Karta of the HUF.
  • A declaration is also provided by each member of the family where they declare the name of Karta and also state that:
    • The Karta has the authority of the accounts vested in his hand
    • The members are the only members of the HUF
    • The Karta holds the right to govern all the transactions of the HUF accounts on behalf of the members.
  • The names of the members of the HUF and the name of the HUF are also required to be stated in the HUF Deed at the time of creation of HUF.
  • It also states the capital with which the HUF has been initiated. There are various sources through which Capital can be introduced in the HUF.

Step 2 – Apply for HUF PAN Card

The HUF will be treated as a separate entity so effectively you get an extra PAN card in the name of the HUF and file the income tax returns separately. This enables you to reduce your tax liability by splitting the incomes to an extra judicial person and also claiming deductions separately.

An application for HUF PAN Card is required to be made in Form 49A which can be furnished online as well as manually. HUF PAN Card Application can be made online through this link: https://tin.tin.nsdl.com/pan/form49A.html

The application for PAN Card and the Income Tax Return would be signed by the Karta.

Step 3 – Open separate HUF Bank Account

  • A HUF is also required to open a Bank Account in which it will receive all payments.
  • A HUF Account can be opened in any bank account.
  • At the time of opening of HUF Bank Account for creation of HUF, all documents pertaining of the HUF should be properly stamped. This rubber stamp should be rectangular as Round Stamps are now not accepted.

What do you mean by a bigger and a smaller HUF?

Generally, the term Bigger HUF and Smaller HUF is used in the matters relating to Joint family Property.

Bigger HUF generally refers to the HUF consisting of all the members of Joint Hindu Family and the Smaller HUF refers to a branch of the such family which is carved out of the bigger HUF and which holds property which is ancestral in the hands of that branch only and which is separately identifiable to that branch and the members of that branch only.

A son can have smaller HUF with his wife and children, while he continues to be a member of his father’s HUF. In his father’s HUF, he is mere a member, and his own, he is a Karta.

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In the case of CIT vs M. M. Khanna(1963), the Bombay High Court held that:

  • It must be remembered that a joint Hindu family springs from a Hindu male and every Hindu male can be the stock of a fresh descent constituting a joint Hindu family a joint Hindu family or a Hindu coparcenary.
  • Where from a Hindu male a joint Hindu family springs into existence, this family goes on having its different branches and sub-branches.
  • Each branch starts with the male descendant of the common ancestor and each sub-branch with the male descendant of the head of the branch.
  • While the entire group proceeding from the common ancestor with its several branches and sub-branches in the normal undivided state is a Hindu joint family, each of the branches of each of the sub-branches again is a Hindu joint family according to the concept of a joint family under the Hindu law.
  • It is, therefore, possible for a main Hindu undivided family to be composed of a large number of branch families, property may be possessed by the entire family in which members of the family have interest by birth.
  • Individual members of the family again may possess property, which belongs to them separately as distinct from the joint family of which they are members.
  • Where a Hindu joint family consists of branch families it may also be that each of the branch families may possess property which constitutes the joint family property of that branch alone and in which the other branches or the main Hindu family as such have no right or interest.

Thus, the Bigger HUF and the Smaller HUF can simultaneously function without any hindrance and simultaneously be assessed to the Income-tax.

Will Co-parceners of a Smaller HUF continue to remain Co-parceners of the Bigger HUF?

  • Co-parceners of an HUF will continue as co-parceners until the HUF is partitioned or until the co-parcener releases all his/her undivided right, interest and share in the HUF in favour of the other co-parceners under a duly executed deed of Release.
  • Co-parceners of an HUF will continue as co-parceners, unless the co-parcener marries a non-Hindu under the provisions of the Special Marriage Act, 1954, in which case there is a deemed severance by such co-parcener from the HUF (Section 19 read with Section 21A of the Special Marriage Act, 1954).

Here are some benefits of forming a smaller HUF:

Forming an HUF can provide you with an extra PAN – The HUF will be treated as a separate entity so effectively you get an extra PAN card in the name of the HUF and file the income tax returns separately. This enables you to reduce your tax liability by splitting the incomes to an extra judicial person and also claiming deductions separately.

Help Claim Life Insurance Deductions separately – Provisions of the Income Tax Act allow individuals to claim tax benefits on certain payments they make during a year. Similar benefits are applicable for an HUF. For example, an HUF can pay Life Insurance premium for individual members, and claim tax benefits under Section 80C. The maximum amount that can be claimed as a deduction under this section is Rs 1.5 lakh.

HUF hold investments in their own name – An HUF is allowed to make investments in tax-saving Fixed Deposits and Equity Linked Savings Scheme (ELSS) to earn tax benefits of up to Rs 1.5 lakh under Section 80C. And while an HUF cannot open a Public Provident Fund (PPF) in its name, it can claim tax deductions for the amount deposited by the HUF in respective PPF accounts of its members.

Help Claim Health Insurance Deductions

  • Every individual or HUF can claim a deduction under Section 80D for their medical insurance which is taken from their total income in any given year. Not only can an individual take benefit by purchasing a health plan for themselves but also one can take advantage of buying the policy to cover their spouse, dependent children or parent. 
  • HUF’s are also eligible to claim deductions under this section. The premium payments of any member in a HUF can be used for tax deductions, which is however, subject to upper limit as per the Act.
  • You can claim a deduction of Rs 25,000 per year on premiums paid for Health Insurance for your family under Section 80D. However, with the rise in Health Insurance premiums, this limit can be insufficient when you want to provide decent health coverage for your family.
  • Here’s where HUF can come to your rescue. You can claim additional tax benefit of up to Rs 25,000 on Health Insurance premiums paid during the year for family members of the HUF. If the person is a senior citizen, the limit goes up to Rs 50,000.

Transfer of Property can help in saving tax  -HUF’s or members of HUF’s generally own an ancestral property that yields rental income. Under normal circumstances, the rent will be attached to a person’s income and will be taxed according to that individual’s tax slab. However, if it is transferred to an HUF, the income will be that of the HUF’s and will be taxed separately.

Forming an HUF can help avoid Tax Audit

Tax Audit refers to the independent verification of the books of accounts of the assessee to form an opinion on the matters related to taxation compliances carried out by the assessee.

Every person who derives income by way of Business or profession and maintains books of accounts and has not opted for computation of income on presumptive basis under section 44AD, 44ADA or 44AE of the Income-tax Act, 1961 has to get tax audit done provided his income exceeds the prescribed threshold limit of:

  • A person carrying on business if the total sales/ turnover exceeds Rs 1 crore during the previous year.
  • A person carrying on profession if the Gross receipts exceed Rs 50 lakhs during the previous year.

However, if the income of an individual is divided with the help of an HUF, the total sales/ turnover or gross receipts will get eventually reduced, thus avoiding the scenario of conducting tax audit.

In conclusion, upon the marriage of a male co-parcener, his wife also becomes a member of the HUF (though the wife of a co-parcener is not a co-parcener but is a member of the HUF). The children of a co-parcener automatically become co-parceners at birth. Under Hindu law, there can be an HUF within an HUF. Therefore, a son can establish his own independent HUF (with his wife and children and further lineal descendants) while he continues to be a member of his father’s HUF.

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