Hindu Undivided Family (HUF) Act & Tax Benefits

When it comes to filing and saving taxes, the Income Tax Act has various sections and categorizations. Hindu Undivided Family is one of those categorization under which members of the family fall. Imagine saving taxes while managing family wealth, all under one umbrella. That is exactly what the Hindu Undivided Family (HUF) Act offers. It is a unique concept that allows families in India to form a joint entity and enjo y some pretty impressive tax benefits. To avail of these benefits, it is important to know the Hindu Undivided Family definition, how it works and what are its advantages and disadvantages.

HUF Meaning

HUF full form is Hindu Undivided Family. When it comes to how you define HUF, it is a unique legal structure recognized by Indian law. In a HUF, the family members share property and income collectively, as if they were a single entity. The head of the family is responsible for managing the family’s affairs.

Another question that might arise is what is HUF account? Simply put, it is the account opened under the name of an HUF that acts as one separate entity. For instance, you have started a small business with your family members, and you want to open an account for it. In this case, you can open a HUF account, with HUF having a separate PAN number. You can also avail of basic tax exemption while filing income tax return of ₹2.5 lakhs as HUF account benefits.

Residential Status of HUF

Residential status is one of the important features to be considered while applying for tax exemptions under HUF laws. We have two main categorizations for this:

• Resident: HUF is considered a resident of India if its affairs are managed either fully or partly within the country.

• Non-Resident: If the entire control and management of the HUF’s affairs are based outside India, it will be classified as non-resident.

Apart from these, there are two more sub-categories: Resident and Ordinarily Resident / Resident but Not Ordinarily Resident. As per Section 6 of the Income Tax Act, 1961, a HUF is classified as “resident and not ordinarily resident” if:

“The manager has been a non-resident in India in nine out of the ten previous years preceding that year, or the manager has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less.”

Simply put, if the head of the Hindu family (Karta) has:

• Lived in India for a total of 729 days or less (at different times or at a stretch) in the past 7 years
  Or
  
• Lived outside India for 9 out of the previous 10 years,

Then, the HUF will be considered a Resident but Not Ordinarily Resident.

How is HUF Taxed?

When it comes to taxing HUF, there are certain important rules, or you can say factors, you should take into consideration:

• A HUF has its own PAN and files a separate tax return, as it’s considered a distinct entity from its members.
• It is taxed at the same rates as an individual.
• It can also take out insurance policies on the lives of its members.
• It can claim deductions under Section 80 and other exemptions in its tax filings.
• Investments made from HUF income generate returns that are taxable under the HUF.
• Members can be paid a salary if they contribute to the HUF’s operations, and this expense can be deducted from the HUF’s income.

Let us understand this through a simple example.

After his father’s death, Mr. Alok Sharma started a HUF with his wife and two children as members. Since Mr. Sharma had no siblings, the property his father owned was transferred to the HUF. This property generates an annual rent of ₹6 lakhs. Mr. Sharma also earns ₹15 lakh from his salary. By forming a HUF, he can save on taxes.

Due to this setup, Mr. Sharma saves ₹1,36,200 in taxes. Both the HUF and Mr. Sharma can claim deductions under Section 80C. Additionally, any income the HUF earns can be invested and will continue to be taxed separately in the HUF’s hands.

How to Save Tax by Forming a HUF?

Forming a Hindu Undivided Family tax opens up numerous avenues for tax savings, providing families with valuable opportunities to optimize their financial strategies.

• Separate Tax Entity: A HUF is treated as a separate entity for tax purposes, allowing it to claim exemptions and deductions independently from its members.
• Deductions under Section 80C: Both the HUF and its members can claim income tax deductions under Section 80C, effectively doubling the benefits.
• Income Splitting: Income can be split between the HUF and its members, reducing the overall tax liability.
• Tax-free Gifts: Gifts received by the HUF from its members are not taxable.

Who are the Members of the HUF?

A Hindu Undivided Family (HUF) members include all individuals who share a common ancestry and adhere to Hindu customs and traditions. This includes:

• The Karta: The head of the HUF, usually the eldest male member.
• Coparceners: Male members who are lineal descendants of the same ancestor, including daughters, after the 2005 amendment to the Hindu Succession Act.
• Other Members: Wives, daughters-in-law, and unmarried daughters.

The distinction between coparceners and members is significant because coparceners have the right to demand partition of the HUF property, whereas other members do not.

How to Form HUF?

Forming a Hindu Undivided Family involves steps that enable families to establish a legal entity for collective wealth management and tax benefits. By understanding the process of forming the Hindu Undivided Family Act, individuals can go through the requirements effectively to leverage its advantages. The key steps involved in forming HUF are:

Family Members

At least two family members must form a HUF. A married couple or family of parents and children can form a HUF.

Eligibility

Hindus, Buddhists, Jains, and Sikhs can form a HUF. The family must belong to the same lineage and follow Hindu customs and laws.

Formation

A HUF is automatically formed at the time of marriage or the birth of a child into the family. While no formal deed is necessary to constitute a HUF, creating a legal deed can help outline the details of the HUF and its members for clarity and official purposes.

Assets

The HUF can hold various types of assets, including inherited property, gifts received, and assets acquired through the HUF’s income. Proper documentation and record-keeping of these assets are crucial for managing the HUF’s wealth and availing of tax benefits.

Registration

Though registration is not mandatory, having a HUF deed registered can help in legal disputes and for clear documentation. The registration process involves drafting and registering a HUF deed with the relevant authorities.

Legal Deed

A HUF deed should mention the members’ names, each member’s share, and the Karta. It serves as a legal document that defines the structure and rules governing the Hindu Undivided Family Act.

PAN Number

Obtaining a Permanent Account Number (PAN) for the HUF is mandatory for tax purposes. Karta must sign the PAN card application and include proof of identity and the HUF’s address.

Bank Account

Opening a bank account in the name of the HUF is essential for conducting financial transactions. Karta should manage this account and use it exclusively for HUF-related transactions.

HUF Account Rules

The rules and regulations governing Hindu Undivided Family (HUF) accounts are important for effective wealth management and tax planning within the family structure. Understanding these guidelines of what a Hindu Undivided Family is ensures compliance and maximizes the benefits of HUF status. Here are the essential rules to consider when managing a HUF account:

Essential Documentation for Opening a HUF Account

To initiate the process of opening a HUF account, specific documentation is necessary to ensure compliance with regulatory requirements. The essential documents include:

• PAN card of the HUF
• Identity proof of the Karta
• Address proof of the Karta
• HUF deed
• Declaration by family members

What are HUF Tax Benefits?

The advantages of establishing a HUF extend notably to tax benefits, offering considerable advantages for families.

• Basic Exemption Limit: One of the HUF tax benefits is enjoying the same basic exemption limit as individual taxpayers.
• Deductions: HUFs can claim deductions under Section 80C for investments in specified instruments.
• House Property: Income from a property owned by the HUF is taxed as HUF income.
• Insurance Premiums: Premiums paid for life insurance policies of HUF members are deductible.
• Business Income: If the HUF owns a business, the profits are taxed at the HUF rate, often resulting in lower tax liabilities.

HUF Advantages & Disadvantages

There are several HUF advantages and disadvantages. From tax savings to better family wealth management for your family, a HUF offers several benefits. Some of the benefits are:

• Tax Benefits: You can save on taxes as the HUF is treated separately.
• Wealth Accumulation: It makes it easier to accumulate and manage family wealth.
• Succession Planning: Simplifies passing on assets to the next generation.
• Investment Opportunities: Opens doors for more investment options and asset growth.

However, there are also some downsides or disadvantages to consider:

• Complex Management: Handling multiple members can make managing HUF tricky.
• Potential Disputes: Family disagreements over assets and income distribution can occur.
• Limited Flexibility: There are restrictions on transferring HUF assets to individual members.
• Tax Implications: Poor management of the HUF can result in negative tax consequences.

Significant Features of Hindu Undivided Family (HUF)

The hallmark features of a HUF encapsulate its unique structure and legal framework, which are essential for understanding its operational dynamics.

• Legal Status: A HUF is a separate legal entity for tax purposes.
• Karta: The eldest male member acts as the Karta, managing the HUF.
• Coparceners: Only coparceners can demand partition of the HUF property.
• Continuity: The HUF continues to exist even after Karta’s death, with the next eldest male member taking over.

Conclusion

The Hindu Undivided Family (HUF) structure and its tax benefits can provide significant financial advantages for families. By utilizing the HUF for tax savings and effective wealth management, families can ensure better financial planning and legacy management. However, knowing the potential complexities and managing the HUF affairs diligently is crucial to avoid disputes and adverse tax implications.

FAQs on Hindu Undivided Family (HUF)

1

What is the difference between HUF and company?

HUF is a family-based entity recognized under Hindu law, while a company is a corporate entity governed by the Companies Act. HUFs are formed by family members and have different tax regulations compared to companies, which are formed by shareholders and operate under stricter corporate governance norms.

2

Can a woman be a HUF Karta?

Yes, after the landmark judgment by the Supreme Court of India in 2016, a woman can become the Karta of a HUF if she is the eldest member, ensuring gender equality in managing HUF affairs.

3

Is HUF a separate legal entity?

Yes, HUF is a separate legal entity recognized by Indian law. It is treated as a distinct entity for taxation and property ownership purposes.

4

Should a HUF always be a resident of India?

No, a HUF can have non-resident status if its control and management are outside India. However, this status can affect the tax benefits and obligations of the HUF.

5

In case of the demise of the Karta, who takes over the title?

Upon the Karta’s demise, the next eldest male member of the HUF typically assumes the role. In some cases, if the family agrees, a female member can also take over as Karta.

6

Is there a minimum number of coparceners required for HUF taxation?

No, there is no minimum number of coparceners required for HUF taxation. Even a single member with ancestral property can form a HUF.

7

Can both the members of HUF and the HUF separately claim deductions under Section 80C?

Yes, the HUF and its members can claim deductions under Section 80C separately, allowing for substantial tax savings.

8

What happens if the eldest male member of the family is an NRI?

If the eldest male member is an NRI, he can still be the Karta of the HUF. However, the HUF’s residential status may be impacted, influencing its tax obligations.

9

Can a woman be the head of a HUF?

Yes, a woman can be the head of a HUF, especially following the Supreme Court ruling that allows daughters to be coparceners and manage HUF affairs.

10

Can there be a HUF with only female members?

Yes, a HUF can only have female members. In such cases, the senior-most female member can act as the Karta.

11

Who are HUF Coparceners?

HUF coparceners are family members who have a birthright to the HUF property. This includes sons, daughters, grandsons, and great-grandsons, who can demand partition and share in the property.

Suggested Readings

1. TDS on Sale of Property by NRI

2.Understanding Expenditure Tax