Hindu Undivided Family (HUF)

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What is HUF?

The term HUF stands for Hindu Undivided Family. Indian Citizens with Hindu ethnicity can come together and save a good amount of taxes by creating a HUF.

There are certain rules and regulations to be followed by HUF. One of such rules is individual and separate PAN for HUF, using which the member can file their returns.

However, most of the people are not aware of the benefits given to a Hindu Undivided Family. There are many Hindu families in India, which are yet not divided, and the income accumulated by those families is considered as the joint income.

The most interesting thing about this fact is that these joint incomes do not impose a tax on specific individuals, rather it is imposed collectively on all family members.

How to Create a HUF?

One of the most important reasons for forming a HUF is to get additional tax advantages. However, before doing so, one should be aware of the terms & conditions required to create a HUF:

  • HUF should only be formed by a family.
  • HUF is automatically created for the newly added member in the family at the time of their marriage.
  • HUF in general consists of a common ancestor and all of his descendants including their daughters and wives.
  • Buddhists, Hindus, Sikhs and Jains are able to form HUF.
  • HUF often has assets which come as a will, gift, or ancestral property.
  • Once the HUF is created, the bank account should be created in the name of HUF. After that, A PAN number will be generated in the name of HUF.

How to Save Taxes by Building A HUF? 

The primary reason behind building a HUF is to get an additional PAN card which would be legally acceptable, as well as to avail the tax benefit. After building the HUF, the members falling under HUF will not have to pay tax individually. As the new HUF PAN card is created, the family can start paying its taxes individually.

The HUF can then start using the new PAN card to file the ITR. If the annual family income exceeds the prescribed limit, the family will be taxed at 10%, 20% and 30% of the income in the slab.

Here’s an example to help you understand the concept of HUF better:

Let’s suppose, a family consists of four members-husband, wife and their 2 children. The annual income of the husband is Rs 20 lakhs and the annual income of a wife is Rs 16 lakh. Besides that, they earn a rental of Rs 6 lakhs per annum from their ancestral land.

Keeping the annual individual income separately, the rent coming from the ancestral land would either be taxed on a husband or on the wife or both of them. Let’s see how it works:

  • If it is taxed on the husband, he at present falls under 30% of the income tax slab. Therefore, he would end up paying 30% of Rs 6 lakhs which will be 1.8 lakhs as the tax amount.
  • If it is taxed on the wife, as she also falls under the 30% of the income tax category, she would end up paying 30% of Rs. 6 lakhs which will be Rs. 1.8 lakh as the tax amount.
  • If it is taxed equally on both husband and wife, each of them would have to pay 30% of Rs 6 lakhs. It eventually means that both of them would have to collectively pay Rs 90,000 + Rs 90,000= Rs 1,80000
  • However, under HUF, one can enjoy additional tax benefits on the rent of the land. For a HUF member, the taxes would be reduced to an amount of Rs. 60,000 to 70,000. That means you will be able to save tax around Rs 1,80,000- Rs 60,000=Rs. 1,20,000.

Illustration of HUF:

Let’s suppose an individual Mr X, decides to start a HUF including his wife, son & daughter after his father passes away. Since Mr X doesn’t have any sibling, his father’s property was transferred under HUF.

Now, if the annual rent of his father’s property is of Rs 7.5 lakhs and Mr X has a salary income of Rs 20 lakhs; he can save taxes as given below:

Income from different sources

Income of Mr X creating HUF

Income of Mr X after creating HUF

HUF Income

Salary

Rs. 20 lakhs

Rs. 20 lakhs

-

Property rent

Rs. 7.5 lakhs

Rs. 7.5 lakhs

Standard deduction on the property

Rs. 2.25 lakhs

Rs. 2.25 lakhs

Income from Property

Rs. 5.25 lakhs

Rs. 5.25 lakhs

Total taxable income

Rs. 25.25 lakhs

Rs. 20 lakhs

Rs. 5.25 lakhs

Section 80C

Rs. 1.5 lakhs

Rs. 1.5 lakhs

Rs. 1.5 lakhs

Net taxable income

Rs. 23.75 lakhs

Rs. 18.5 lakhs

Rs. 3.75 lakhs

Tax payable

Rs. 5,53,625 lakhs

Rs. 3,91,400 lakhs

Rs. 7,725

Total tax paid by Mr. X & HUF

Rs. 3,99,125

Tax saving after creating HUF

Rs 1,54,500 lakhs

 

Due to the aforementioned tax arrangement, Mr X managed to save tax of 1 lakh 54 thousand, five-hundred rupees. Both Mr X and the HUF (including other members of HUF) can claim tax deduction u/s 80C.

Advantages of Creating HUF:

  1. Just like other individuals, even HUF members are liable to pay taxes every year. If the turn over of the business of a HUF member exceeds over Rs.25 lakhs or Rs. 1 crore, s/he needs to perform tax audit under the guidance of a certified Chartered Accountant as mentioned in the Section 44AB of the Income Tax Act.
  2. The head of a HUF has all the power to sign the relevant documents on behalf of other members in her/his family. S/he also has the right to permit any other older member of the family to carry out the activities.
  3. An adopted child may also become a member of the HUF.
  4. HUF is recognised all over India except Kerala.

Disadvantages of Creating HUF:

There are many advantages of forming the HUF but there are disadvantages, too of building a HUF. Here’s a look at the disadvantages of creating a HUF:

Same rights to every member:

One of the primary disadvantages of building a HUF is that every member of the family has the same rights on every asset of the family. The common property cannot be sold without getting the consent of everyone in the family. Besides that, birth and marriages increase the number of family members.

Partition:

Closing a HUF is much tougher than opening or building a HUF. Partition of the family with a small group may lead to dissolving of the HUF. After closing down a HUF, assets of the family needs to be distributed among all the family members which are sometimes very difficult to manage. In addition to that, legal hassles create more disturbances in it.

Joint families losing their relevance

HUF is considered as a separate tax entity by the income tax department. But in today’s time, the joint families are increasingly losing their importance and relevance. There are several cases coming out these days, where HUFs are fighting over petty issues or about the property. Also, it is observed that day by day, the case of divorces is increasing. As a result of all these factors, HUF is losing its relevance as a tax saving tool.

Final Thoughts:

Like every other scheme, HUF to has good and bad aspects associated with it. So, keeping these things in mind the HUF members should act towards their assets and property. The Karta should be aware when it comes to giving the property to any particular family member as a gift. The specific individual would only be able to receive the property by following the legal norms.

Hindu Undivided Family (HUF) Frequently Asked Questions

1. Who can be the Karta of the family?

The head of the family is considered the Karta of the family. He must be a senior male member.

2. Can a woman be HUF Karta?

Yes, a woman can be a HUF Karta. Until January 2016, a woman could not play the role of Karta of HUF.

3. Are there any certain rules and regulations that make it mandatory for the HUF member to reside in India?

It is not essential that the member of the HUF must reside in India. They can reside and operate the HUF even from outside India.

4. If the Karta resides outside of India and the HUF is managed by the family members who are residing in India, will the HUF be considered as non-resident?

The residential status is not determined based on the Karta’s living area but from where the HUF is being operated from. Even if the Karta resides outside India and HUF is managed and operated by other family members, the HUF will be considered a resident of India.

5. Who is a HUF Coparcener?

The male members in a HUF are known as coparceners; whereas, the female members are simply known as the members in a HUF.  One of the major differences between these two is that while coparceners demand HUF partition; the female members don’t have this right.  However, after the Hindu Succession (Amendment) Act, 2005 removed this gender discrimination effective 9th September 2005 by providing equal rights to both female children as well as male children of a HUF.

Now, the daughters too, are the coparceners in a HUF and have the same rights as that of sons in a HUF.

6. Are the daughters allowed to claim a share in their father’s property if their father had passed away before the application of Hindu Succession (Amendment) Act, 2005?

No, the daughters can’t claim a share in their father’s property if their father had passed away before the application of Hindu Succession (Amendment) Act, 2005. Both the father and the daughter have to be alive on the amendment date to claim the benefit, regardless of whether she is single or married on the given date.

 

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