Hindu Undivided Family (HUF)

The full form of HUF is Hindu Undivided Family. HUFs are significant for tax purposes, as they are treated as separate entities, allowing for potential tax benefits. The important aspect of a HUF is that tax on joint incomes is not imposed on specific individuals and, rather, is levied collectively on all family members, providing potential tax benefits.

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What is HUF?

A Hindu Undivided Family (HUF) is a unique legal and tax entity specific to Hindu families in India. It is based on the concept of a joint family that includes all family members across generations, with the eldest male member typically acting as the head or "Karta" of the family. HUF typically has assets that come from ancestral property, a gift, a property acquired from the sale of joint family property, a will, or property donated to the common pool by members of HUF.

Who are the Members of the HUF?

All individuals belonging to a Hindu family, including husbands, wives, children, their respective spouses, and their offspring, are eligible to be included in a HUF. In this structure, the male family members are referred to as coparceners, while the female family members are simply termed as members. The right to request a division of the HUF is exclusively reserved for coparceners.

What are the HUF Account Rules?

One should be aware of the terms & conditions required to create a HUF. Below are a few HUF account rules:

  • HUF should only be formed by a family.

  • HUF is automatically created for the newly added member of 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 can 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

  • Every member of the family can deposit their income in the common corpus

  • Tax benefits are applicable on deposits under various sections

  • Corpus can be divided only on the agreement of every coparcener of the family.

What are the Steps to Form HUF?

Conditions to Form HUF:

  1. Family Members:

    One person cannot form an HUF. It can only be formed by a family. A HUF consists of a common ancestor and all of his lineal descendants, including their wives and unmarried daughters.

  2. Eligibility:

    Hindus, Buddhists, Jains, and Sikhs are eligible to form HUFs.

  3. Formation:

    A HUF is automatically created at the time of marriage. It includes the husband, wife, and their children.

  4. Assets:

    HUF usually has assets which come as a gift, a will, or ancestral property, or property acquired from the sale of joint family property or property contributed to the common pool by members of HUF.

  5. Registration:

    Once an HUF is formed, it must be formally registered in its name.

  6. Legal Deed:

    A HUF should have a legal deed. The deed shall contain details of HUF members and the business of the HUF.

  7. PAN Number:

    A Permanent Account Number (PAN) must be obtained in the name of the HUF.

  8. Bank Account:

    A bank account should be opened in the name of the HUF.

    By following these steps, you can form a HUF and avail the benefits it offers, such as tax advantages and efficient management of family assets.

Invest & Save upto ₹46,800 per annum in taxInvest & Save upto ₹46,800 per annum in tax

How to Save Taxes by Building A HUF? 

  • The HUF has its own Permanent Account Number (PAN) and files a separate tax return.

  • A separate joint Hindu family business is created, with the HUF being a distinct entity from its members.

  • Deductions under Section 80 and other applicable exemptions can be claimed in the HUF's income tax return.

  • The HUF can take out insurance policies on the lives of its members.

  • Members contributing to the functioning of the HUF can be paid a salary, which is then deductible from the HUF's income.

  • Investments can be made from the HUF's income, and returns on those investments are taxable in the hands of the HUF.

  • The HUF is taxed at the same rates applicable to individual taxpayers.

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 siblings, his father's property was transferred under HUF.

Now, if the annual rent of his father's property is 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 before 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. 5,46,000 Rs. 3,82,200 Rs. 6,500
Total tax paid by Mr. X & HUF Rs. 3,88,700
Tax savings after creating HUF Rs 1,57,300

Both Mr. X and the HUF (including other members of HUF) can claim tax deduction u/s 80C.

What are HUF Tax Benefits?

Tax benefits are one of the major HUF advantages. These include:

  • Tax deductions can be availed under section 80C for the HUF account.

  • Gifts up to worth Rs 50,000 will be tax-free. A father who owns a HUF account can gift a property or money of higher worth to a son who owns a smaller HUF account. The gift should specifically be for the son's HUF. In such instances, tax benefits under sections 64(2) and 56(2) can be enjoyed.

  • Corpus can be used for investment in tax-free money instruments.

What are the Advantages and Disadvantages of HUF?

HUF's advantages and disadvantages are many, some of which are mentioned below.

  1. Advantages of HUF:

    • Tax Benefits: Like individual taxpayers, HUF members are liable to pay taxes annually. However, the HUF structure allows for separate tax filing, which can provide tax benefits and savings.

    • Management and Control: The head of the HUF has the authority to sign relevant documents and make decisions on behalf of other family members, streamlining the decision-making process.

    • Inclusivity: An adopted child is eligible to become a member of the HUF.

    • Legal Recognition: The HUF structure is recognized all over India, except in Kerala, providing legal validity to the family's financial affairs.

    • Financial Support: Members can easily avail of loans under the HUF entity.

  2. Disadvantages of HUF:

    • Equal Rights on Assets: All family members have equal rights on family assets, which can lead to complications when consent is needed for asset sale or distribution.

    • Complexity in Dissolution: Closing a HUF can be complicated, with legal and logistical challenges involved in asset distribution among family members.

    • Decreasing Relevance: With the shift from joint families to nuclear families, the relevance and importance of HUF as a tax-saving tool are declining. Cases of disputes and divorces further complicate the situation, diluting the benefits of the HUF structure.

Conclusion

Like every other scheme, HUF 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 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.

FAQ's

  • What is the full form of HUF?

    The full form of HUF is Hindu Undivided Family
  • Is income from a Hindu undivided family taxable?

    Yes, income from a Hindu Undivided Family (HUF) is taxable. However, it is taxed separately from the individual incomes of the family members, often leading to tax benefits.
  • What is the difference between HUF and company?

    An HUF is a specific legal entity under Hindu law, where family members share income and assets. In contrast, a company is a separate legal entity that can be owned by individuals or other entities. While both are subject to tax, the tax regulations and structures differ significantly between a HUF and a company.
  • What is undivided property under Hindu law?

    Under Hindu law, undivided property refers to property that belongs to an HUF and is collectively owned by all its members. This property has not been partitioned or divided among the individual family members.
  • What is HUF?

    HUF means Hindu Undivided Family. One can save taxes by creating a family unit and pooling in assets to form a HUF. A Hindu family can come together and form a HUF. HUF has its own PAN and files tax returns independently of its members.
  • Can a woman be a HUF Karta?

    As per the earlier HUF account rules, a woman was not allowed to be a Karta of the HUF. However, in 2016, the Delhi High Court ruled in favor of a female being the Karta of a HUF. These changes have not been incorporated into the Income Tax Act as yet.
  • Should a HUF always be a resident of India?

    According to the HUF account rules, HUF must not necessarily be a resident of India. If the control and management of the HUF are outside India, the HUF would be a non-resident.
  • In case of the demise of the Karta, who takes over the title?

    As per HUF account rules, in case of the demise of Karta, the eldest male member of the family becomes the Karta of the family.
  • Mention HUF's advantages and disadvantages in a nutshell.

    HUF's advantages and disadvantages are as under:
    Advantages of HUF:
    • Two PAN cards can be created, and each of them files the taxes separately
    • An adopted child can also be a HUF family member
    • One can form different taxable units of HUF.
    Disadvantage of HUF:
    • Common property cannot be sold without the consent of all the members
    • Closing a HUF is difficult compared to opening a HUF.
    • Joint families are intensely losing their importance.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
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