What is HUF?

Understanding what is HUF?

HUF (Hindu Undivided Family) is a family structure that enables tax savings by pooling assets together and forming a unified entity. Once formed, the HUF is taxed separately from its individual members, offering an effective tax-saving strategy. Any Hindu family (including Buddhists, Jains, and Sikhs) can form an HUF. HUF have their own PAN and file tax returns independently.^[2]

Within the HUF, members including the Karta are called coparceners, they are related to one another and the Karta (head of the family). Coparceners inherit a share of the family property by birth and are limited to the first four generations. Previously, only sons of the HUFs were coparceners, but since 6th September 2005, daughters have been granted equal coparcenary rights, allowing them to inherit family property and seek partition.^[2]

A HUF includes

Resident HUF:

A HUF is considered a resident in India if the control and management of its affairs are conducted either wholly or partially in India.^[2]

Non-Resident HUF:

If the control and management of the HUF’s affairs are entirely outside of India, it will be classified as a non-resident.^[2]

Resident and Ordinarily Resident / Resident but Not Ordinarily Resident:

For a resident HUF to be classified as resident and ordinarily resident (ROR), the Karta (head of the family) must meet two conditions that apply to individuals:

1. The Karta must have been a resident in at least 2 out of the 10 years preceding the relevant previous year.^[2]
2. The Karta must have stayed in India for at least 730 days or more during the 7 years immediately preceding the relevant previous year.^[2]

How Does HUF Benefit its Members?

Tax Savings

An HUF is taxed according to the same income tax slabs that apply to individual taxpayers.

Since an HUF is treated as a separate taxable entity, it is eligible for the basic tax exemption of ₹2.5 lakh on its total taxable income^[3]. This exemption is in addition to the individual tax benefits that you and your family members may already receive.^[3]

Moreover, income from the following sources is not taxable under the HUF^[3]:

• Income from property transferred by a member to the HUF without adequate consideration.
• Income from a woman’s personal property.
• Income from an impartible estate, which is taxable for the estate holder and not the HUF.

An HUF can also claim deductions under sections 80C, 80D, and other provisions of the Income Tax Act, just like an individual taxpayer. Income derived from ancestral properties or businesses can be taxed under the HUF, which helps reduce the taxable income of individual family members.^[3]

Wealth Management

An HUF allows for the joint management of family wealth. Ancestral assets such as properties, businesses etc can be collectively managed under one unified entity.^[3]

How to Create an HUF?

Creating a HUF involves three simple steps:

Step 1: Create an HUF Deed

The first step is to draft a HUF deed, which is a formal legal document signed on stamp paper. This deed should clearly mention the names of the Karta (head of the family) and the co-parceners (other family members). Along with the deed, each family member must provide a declaration where the name of the Karta is declared and it is stated that ^[4]:

• The Karta has the right to oversee all transactions of the HUF account on their behalf.
• The members listed in the deed are the only members of the HUF.
• The Karta has the authority over the HUF account.

Step 2: Apply for HUF PAN Card

As the HUF is considered a separate taxable entity, it must have its own PAN card. To apply, you need to fill out Form 49A, which can be submitted both offline and online.

Step 3: Open an HUF Bank Account

The final step is to open a separate HUF bank account. This account will be used to manage all the financial transactions and receive payments. The account can be opened in any bank of your choice.

HUF and Taxation

• HUF is eligible for deductions under Section 80 and other relevant exemptions available under the Income Tax Act.^[4]
  
• It is allowed to take insurance policies for its members^[4].
• The HUF can also pay salaries to its members if they contribute to the functioning of the HUF^[4].
• Investments made using the HUF income are allowed, and the returns generated from such investments are taxable.^[4]

Conclusion

In conclusion, an HUF is a powerful tool for family wealth management, tax planning, and succession planning. It provides families with the flexibility to manage their assets jointly while benefiting from the legal status of a separate entity. The tax benefits that come with creating an HUF can significantly reduce the tax liability for the family, making it an essential tool for families looking to optimize their financial planning.

If you are considering creating an HUF, it is recommended to consult with a tax professional or financial advisor to understand the specific requirements and benefits of your situation.

FAQs

• What is an HUF?

  
  

  A HUF (Hindu Undivided Family) is a family structure that allows you to pool assets together and save taxes. It is treated as a separate legal entity for taxation purposes under the Income-tax Act, of 1961.^[1]
  
  

   

• Who can form a HUF?

  
  

  A Hindu family can come together to form an HUF, and it also applies to Buddhists, Jains, and Sikhs.^[2]

  
  
  

• What is the role of the Karta in an HUF?

  
  

  The Karta is the head of the HUF and has the authority to manage its affairs, including overseeing financial transactions and making decisions on behalf of family members.

  
  
  

• Who are the coparceners in an HUF?

  
  

  Coparceners are family members who inherit a share of the family property by birth, including sons, daughters, and their descendants. Since the Hindu Succession (Amendment) Act, of 2005, daughters have equal coparcenary rights as sons.^[2]

  
  
  

• Can daughters be coparceners in an HUF?

  
  

  Yes, after September 6, 2005, daughters are granted coparcenary rights and can inherit family property and demand a share, just like sons.^[2]

  
  
  

• What are the tax benefits of an HUF?

  
  

  An HUF is eligible for the basic tax exemption of ₹2.5 lakh and can claim deductions under sections 80D, 80C and other provisions, similar to individual taxpayers.^[3]

  
  
  

• Is income from ancestral property taxed under the HUF?

  
  

  Yes, income from ancestral properties or businesses can be taxed under the HUF, helping reduce the taxable income of individual family members.^[3]
  
  

• How is an HUF taxed?

  
  

  HUFs are taxed in the same income tax slabs as individual taxpayers, but their income is treated separately from that of individual family members^.[3]

References:

 ^[1]https://incometaxindia.gov.in/pages/i-am/huf.aspx

 ^[2]https://cleartax.in/s/huf-hindu-u]ndivided-family

^[3]https://groww.in/blog/what-is-huf-and-benefits

^[4]https://www.orowealth.com/insights/blog/hindu-undivided-family-meaning-and-benefits/