Category: Intelligent Investor

According to suitability, there are various ways of doing business in India, but the government has recognized that family businesses should also be regulated and incorporated. Hindu Undivided Family (HUF) is a way of doing family business in a very structured and legal manner, making it possible to reduce family disputes due to business in the long term. Let’s understand in detail what HUF is and how it works.

What is a HUF?

A simple concept in business is that you should treat yourself as separate from your business. By continuing the thought, the Hindu Undivided Family is a joint family considered a separate entity from the individual family members. The family generally holds assets that have been passed on from their ancestors. Assets also include a gift or a property purchased from the sale of joint family property.

How does it work?

There is a head of the family called “Karta”, who is the eldest member of the family and operates the business or whose consent is required to take material business-related decisions. All the members of the family are considered members of HUF. However, only male members of the HUF, called coparceners, can only demand the partition of the HUF. Female members of the HUF do not have such a right.

Conditions to be satisfied before forming a HUF

A primary reason for creating a HUF is to claim an additional tax deduction from income tax authorities. But, you need to satisfy the following conditions to create a HUF:

• It must be created by the family, which means all the members of HUF must have the same ancestors.
• Only Buddhist, Hindu, Sikh, and Jain communities can form a HUF.
• The assets of the HUF must come as a will, gift, or ancestral property.
• When you form a HUF, you must also create a bank account in the name of HUF. The deductions and exemptions of tax can be claimed only if the HUF’s bank account has made the transaction. It must be created using a PAN in the name of HUF.
• Division of corpus will be possible only in the case of male members of HUF coparceners.

Advantages of forming a HUF

There are various advantages of forming a HUF over incorporating other forms of businesses like company, partnership firms, LLP, etc. These advantages are as follows:

• You can claim a tax exemption limit of up to Rs 2,50,000, which is the basic exemption limit for individuals as well.
• You can invest the proceeds of businesses, and returns thereon will be eligible for claiming deduction if they are eligible for the same by the income tax act 1961, such as deductions under section 80C.
• You can own a residential house property in the name of HUF without paying tax on the same.
• You can avail of a home loan in the name of HUF by utilizing the credit score of your HUF.
• You can also claim a deduction of the premium paid toward health insurance in the name of any HUF member.

Disadvantages of HUF

When there is a positive side, there has to be a negative side as well. Here are a few disadvantages of forming HUF:

• New members can become members of HUF, but they cannot become coparceners by way of marriage. New members can become coparceners by birth.
• There will always be an unequal distribution of power as the Karta will have the supreme power in making decisions.
• Once tax returns are assessed as HUF, there is no going back. It will always be assessed as a HUF only until it gets dissolved.

Keeping all the advantages and disadvantages of HUF in your mind, you can decide whether you want to create a separate entity to save tax or not. It all depends on the type of business, family corporations, and current financial situation. It would help if you kept in mind that the Karta of the family should be aware of the property and financial transactions done by coparceners.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual funds are subject to market risks, read all scheme-related documents carefully.

When you order a pizza, the billing executive usually asks whether you need any top-up of cheese, olives, chicken, or other toppings over the basic pizza you ordered. So, these toppings can be compared with the top-ups in the health insurance industry. Every Mediclaim policy has a certain sum assured or coverages which one may exhaust, and thus to have better security, top-up plans come in handy at a reasonable cost.

How do top-up insurance plans work?

Suppose you have purchased a Mediclaim policy which has a sum assured of Rs. 10 lakhs. However, given the ever-increasing cost of medical treatment and increased risk of chronic illnesses, especially after the pandemic, Rs. 10 lacks can get exhausted within a few days at the hospital. So, in this scenario, you can have two ways out. You can buy another insurance that has a higher sum assured, or you have a top-up plan to increase your sum assured, but the difference would be in the premium.

Top-up insurance comes into play when the primary insurance policy has been exhausted. Suppose you have this Rs. 10 policy and you fell ill with a chronic liver problem, and the bill amounted to Rs. 16 lakhs. Your primary policy will get completely exhausted, and the remaining Rs. 6 lakhs can be paid using the top-up policy.

Often people confuse top-up policies with riders while both are entirely different. Top-up policies are like primary insurance or reimbursement policies, but the difference is in the premium or the cost of having one.

Features of top-up insurance policies

• As said above, these policies are similar to the primary health insurance plans, so you can also convert them into primary ones.
• If you have a top-up insurance plan covering both parents, the child can automatically get coverage in the same plan.
• There is no upper limit or sub-limits on expenses at the hospital like bed charges, doctors’ fees, and others.
• Many of the top-up plans offer cumulative bonuses on the sum assured for the years where no claims are made, Unlike basic health insurance, top-up plans don’t require you to go for health check-ups. You can avail of these plans based on your basic health insurance policy.
• The top-ups can be renewed every year without any limit.

Coverages provided by top-up plans

Top-up plans usually cover the following expenses:

• Pre-hospitalization expenses of 60 days before hospitalization
• Post-hospitalization cost of 90 days after discharge from the hospital
• Day-care procedures requiring less than 24 hours of hospitalization
• Some of the plans also cover the organ donor’s expenses
• Every hospitalization expense will be covered, from room/ bed charges to doctors’ fees, medications, nurse or attendants’ fees, OT charges, artificial life support machinery costs, implants, and diagnostic procedures as well.

Who should buy top-up health insurance plans?

While anyone can buy these plans, top-ups are more suitable for families with elderly people. As the health risks increase with age, the chances of exhausting basic health plans also increase when there are elderly people. So, having top-up and primary insurance can be beneficial for older adults. Also, if someone has some chronic diseases and requires hospitalization frequently, having a basic health insurance policy of a higher sum assured along with top-up plans can be beneficial.

Advantages of top-up plans

• Top-up policies can be a savior when you have exhausted your primary policy and still, there are many months before the policy renewal. Suppose you need hospitalization within this duration, and then you can use the top-up plan and not have to worry about the expenses at the hospital.
• While you can get the same coverage, the premium you will pay for top-ups will be much less than for primary policies.
• You can also avail of tax benefits under section 80D of the IT Act for the premium you pay for top-up policies.

Conclusion

While general inflation is scaring everyone, medical inflation is at some other level making many families lose their life savings. Thus, having top-up plans to secure your health and finances can be a wise decision to take at this moment.

This blog is purely for educational purposes and not to be treated as personal advice. Insurance is a subject matter of solicitation