A Hindu Undivided Family (HUF) consists of members of a joint family or a married couple. Moreover, the Hindu Law Board is the governing body for a HUF. However, besides Hindu families, Jain, Sikh, and Buddhist families can also form a HUF. However, from the point of view of income tax planning, HUF is a separate legal entity. Therefore it is identified as a different person and enjoys the same slab rate as that of an individual. Therefore, it can be used as an effective tool for planning the tax, which is often overlooked by many families, resulting in paying additional tax to the government every year. In this article, we discuss various nature of incomes that can be taxed in the hands of HUF and also discuss the deductions which it can claim for planning the tax. We shall also discuss some frequently asked questions related to HUF.
What is HUF?
A HUF (Hindu Undivided Family) is a separate tax entity in the eyes of the Income Tax Department in India. For example, if there were 2 parents in a family along with two children, then they could form a HUF. The HUF would become the fifth member of the family and get all the tax planning benefits. It would be able to get deductions under 80C, LTCG up to Rs 1 lakh, open a demat account and also apply for IPO. To open a HUF demat account some additional documents are also required. Although HUF is not a separate legal entity, it is a separate entity in the eyes of the Income Tax Department.
Members of HUF
Any Hindu family, extending to Buddhists, Jains and Sikhs, can create a HUF. The HUF can have a husband, wife and two children at least. A HUF can be formed with a minimum number of two members however from a taxation point of view HUF should consist of a minimum of two coparceners. Let us better understand this through the following flowchart.
This is the main HUF. Earlier, a married daughter was not part of HUF, however, now married daughters are also treated as coparceners and can demand a share in the HUF’s assets. Son 3 and daughter 1 form the part of the main HUF 1 only.
Here, son 1, his wife and son form the second HUF and claim a separate deduction of income from the tax planning point of view.
Son 2 and his wife also form a different HUF. However, from the point of view of tax planning, there should be a minimum of two coparceners for an income to be taxed in the hands of HUF except if the income is received on the partition of the main HUF.
Thus, we can see that one large HUF can have multiple smaller HUFs in it. Along with it, one family member can be a part of multiple HUFs. However, an individual can be a member of their fathers or forefather’s HUF but not of their children’s HUF.
Who is HUF Karta?
The manager of a HUF is called the Karta, who manages the overall functioning and decision making of the HUF. This is usually the senior-most member of the HUF. In case the Karta is unable to carry out his duties, the next senior-most member of family can become the Karta.
HUF member categories
All HUF members fall into one of the following two categories:
In an undivided entity such as HUF, only the coparcener has the authority to ask for their share. For example, a son can be both a member and coparcener in a HUF. However, the son’s wife can only be a member and not a coparcener. Additionally, as per the Hindu Succession Act, 2005, a married daughter can remain a coparcener after her marriage in her father’s HUF with equal rights on the property as her brother.
In an undivided entity such as HUF, the member does not have the authority to ask for their share. As seen earlier, the son in a HUF can ask his father to divide his share from the HUF and hand it over to him. However, the son’s wife cannot ask to do so.
HUF Registration Process
A HUF is automatically created as long as there is a Hindu family of coparceners and members. However, to bring it up as a separate entity for the Income Tax Department, the HUF needs to have its own PAN card.
For HUF PAN card creation, one requires an affidavit. The affidavit will state the name of the HUF Karta and the date of formation of his HUF along with the names of the other members of the HUF. The date of creation can be the marriage date of Karta or the date of his first child. The affidavit along with the HUF PAN needs to be submitted to the Income Tax Department. The HUF PAN can be used to open a separate bank account as well as to get TAN, GST, etc. for a business.
Income source for HUF
There are three ways of creating initial income for a HUF as follows:
- The Paitrik Sampatti which has been going through generations in the family can be tilted to the HUF.
- Gifts from relatives or acquaintances up to Rs 50,000 can be taken as HUF income. For gifts above Rs 50,000, there will be tax implications.
- Business income from any business which is run by the whole family.
Assets for HUF
Once HUF is formed and capital income is generated, the HUF can also invest the income to purchase assets. All assets which an individual can purchase can also be bought under HUF as follows:
- Fixed deposit
- Mutual funds
- Equity shares
- Real estate
Formation of HUF – Tool for tax planning
Since HUF is a separate legal entity in the eyes of income tax it enjoys various benefits including separate slab rates and various deductions. Thus, HUF is easily used to save a significant amount of tax. Income tax slab rates for individuals are also applicable for HUF. The major difference between individual tax planning and HUF tax planning is that Rs 12,500 rebate under Section 87A is not available to HUF.
We can understand this better through an example. To illustrate, we have taken two situations where Mr Rajesh, a resident individual being a part of a joint family earns the following income. In case I, we have considered if all income is taxed under Mr Rajesh. Meanwhile, in case II, Mr Rajesh has formed a HUF and some income along with some deductions is being transferred to the HUF.
|Particulars||Tax on Income of Rajesh (Before HUF)||Tax on Income of Rajesh (After HUF)||Tax on income of HUF|
|Standard deduction on house property||1,08,000||1,08,000|
|Income from house property||2,52,000||2,52,000|
|Income from short term capital gain on shares||2,40,000||2,40,000|
|Total taxable income||14,42,000||10,00,000||4,92,000|
|Net taxable income||12,92,000||8,50,000||3,42,000|
|Short term tax@15%||36000||0||13800|
|Total tax due||164100||72500||13800|
|Health and education cess||6564||2900||552|
|Total tax payable||1,70,664||75,400||14,352|
|Total tax paid by Rajesh & his HUF||75400+14352=89,752|
|Tax saved on creation of HUF||80,912|
Thus, we notice that a significant amount of tax has been saved in case two.
Incomes that can be taxed in the hands of HUF
- Own business income- It can run its own business and that can be taxed in the hands of HUF
- Trading – Profit/loss derived from the trading of shares can be taxed in the hands of HUF
- House property income- Rental income received from house property can be taxed in HUF
- Ancestral property income derived from ancestral property is taxable as income of HUF
- Interest income – HUF can provide loans and earn interest income
- Commission income – Commission income can be tax in the hands of HUF
Incomes that cannot be taxed in the hands of HUF
- Salary income or personal income of members
- Income derived from the individual property of daughters
- If a member transfers his personal property to HUF without adequate consideration
- Stridhan – It purely belongs to the woman and hence cannot be taxed in HUF
Kindly note that the above lists are illustrative and not exclusive.
Deductions applicable for HUF
|SECTION||PARTICULARS||ELIGIBILITY CRITERIA||MAXIMUM LIMIT|
|Section 80C||Life Insurance Premium||Any member of HUF||1,50,000/-|
|PPF||Any member of HUF|
|NSC & Accrued Interest thereon||–|
|Principal repayment of House Loan||–|
|FD in scheduled bank/post office||5 years or more|
|Notified bonds of NABAD||–|
|Senior Citizen Savings Scheme||–|
|Unit Linked Insurance Plan||–|
|Section 80D||Medical Insurance Premium, Central Government Health Scheme||Any member of HUF||Max 50,000 (in case of senior citizen max limit is double) Preventive health checkup not allowed for HUF.|
|Section 80DD||Medical treatment/maintenance of handicapped dependent relative.||Any member of HUF||Disability: Normal – 75000/- Severe – 125000/- (Flat Deduction)|
|Section 80DDB||Medical treatment of specified disease||Any dependent member of HUF||Lower of: i)Actual expense ii)40000 (100000 in case of senior citizen)|
|Section 80G||Donations as per category||All assessee||50% or 100% as per category|
|Section 80GGC/80GGB||Donation to Political Parties/Electoral Trusts||All assessee||100% of the donation|
Once a HUF is formed it cannot be dissolved. However, it is possible to partition a HUF. This is both a pro and con of creating a HUF. A complete HUF partition is allowed but a partial partition is not. The HUF partition can occur by writing a deed stating the method partition of the HUF between all the coparceners and their division of shares. HUF partition is not a taxable event under income tax rules.
Loan by HUF
A loan can be taken in the name of a HUF, however, the coparceners or Karta are made co-applicants for the loan since it is not an actual entity. Hence, if the HUF fails to pay back the loan then the coparceners or Karta will be liable for it. Additionally, HUF can also take loans from its members and pay interest on it to the members. The interest will be deducted from the HUF’s income.
Can HUF become a business partner?
Since a HUF is not a real person it cannot become a business partner, an LLP partner or a company managing director. Although, HUF can be a company shareholder and thus nominate an individual for becoming a director. Likewise, any HUF member can become a partner in an LLP or business on behalf of the HUF.
Who should create a HUF?
Individuals who have Paitrik Sampatti or multiple sources of income or possibilities of gifts are advised to create a HUF. Thus, if there are multiple sources of income that will increase an individual’s income tax pay then creating HUF as tax planning is advisable.
Q. Can a woman be HUF Karta?
A. No, not as per the Act. However, there are few case laws in support of the same.
Q. Can female members demand the partition of HUF?
A. No, only male members can. However, states like Maharashtra and Tamil Nadu have allowed unmarried daughters to exercise the right.
Q. Can a HUF be a non-resident of India?
A. Yes, if the control and management is situated outside India.
Q. Can HUF be a partner in the firm?
A. No, HUF can not act as a partner in the firm.
Q. Can HUF hold shares of the company?
A. Yes, shares can be registered in the name of the Karta.
To sum up, it would not be wrong to say that HUF itself is a very effective tax-saving scheme that can be formed with bare minimum formalities. However, it is always advised to take professional opinion wherever necessary.
For more details watch the video below.
Join the LLA telegram group for frequent updates and documents.
Download the telegram group and search ‘Labour Law Advisor’ or follow the link – t.me/JoinLLA