HUF stands for Hindu Undivided Family. It is a collective family unit formed for tax-saving purposes by aggregating or pooling assets. It is a joint family structure where the HUF is considered a distinct entity separate from its individual members.
The HUF includes Hindus, Buddhists, Jains, and Sikhs. It obtains its own Permanent Account Number (PAN) and files tax returns independently. The HUF is headed by the ‘Karta,’ who manages the HUF’s business affairs. The assets of the HUF typically consist of ancestral property, gifts, proceeds from the sale of joint family property, property acquired through a will, or contributions made by HUF members into the common fund.
What is a HUF?
HUF means Hindu Undivided Family. You can save taxes by creating a family unit and pooling in assets to form a HUF. HUF is taxed separately from its members. A Hindu family can come together and form a HUF. Buddhists, Jains, and Sikhs can also form an HUF. HUF has its own PAN and files tax returns independent of its members.Members of the HUF are called coparceners. They are related to each other and to the head of the family. HUF may contain many members, but members within four generations, including the head of the family (Karta), are called co-parceners. A Hindu Coparcenary includes those persons who acquire an interest in joint family property by birth. Earlier, only males were considered as coparceners. With effect from 6th September 2005, daughters have also been accorded coparcenary status. It may be noted that only the coparceners have a right to partition.
A daughter of a coparcener by birth shall become a coparcener in her own right in the same manner as the son. Being a coparcener, she can claim the partition of assets of the family.
Members of the HUF
- All members of a Hindu family, including wives, children, daughters-in-law, and grandchildren, can be part of the HUF.
- Within the HUF, male members are called coparceners, and female members are referred to as members.
- Only coparceners have the legal right to request the partition of the HUF, dividing its assets among the members.
- With the amendment in the Hindu Succession Act in 2005, daughters now have equal rights as sons in a HUF. They become coparceners in the HUF from birth, granting them the same privileges and responsibilities as male members. This means that daughters can demand their share of HUF properties just like sons.
HUF Rules
- HUF should be formed by a family.
- HUF is automatically created when a member gets married.
- HUF consists of a common ancestor and all descendants, including daughters and wives.
- Buddhists, Hindus, Sikhs, and Jains can form HUF.
- HUF commonly holds assets received through wills, gifts, or ancestral property.
- A dedicated bank account should be opened in the name of HUF, along with obtaining a PAN number.
- Members can contribute their income to the common corpus of HUF.
- Tax benefits are applicable to deposits made under relevant sections.
- The division of the HUF corpus requires agreement from all coparceners.
Tax Implications of Forming a HUF
HUF is taxed separately as it possesses its own Permanent Account Number (PAN) and files an independent tax return. By virtue of its separate existence from its members, HUF is recognized as a distinct entity, which allows for the creation of a separate joint Hindu family business. The HUF is subject to taxation at the same rates applicable to individuals. The HUF is eligible to claim deductions under Section 80 and other exemptions in its income tax return.
Insurance policies can be taken by the HUF on the lives of its members. In cases where HUF members contribute to the functioning of the HUF, the HUF can provide salary payments to them, and these salary expenses can be deducted from the HUF’s income. Investments can be made using the income of the HUF, and any returns derived from these investments are taxable in the hands of the HUF.
How HUFs Help to Save Tax?
- HUFs are eligible for independent income tax deductions, including those under Section 80C.
- They can also claim deductions under various sections like 54(B, D, EC, F, G,) and 47.
- All resident and non-resident HUFs in India have a standard tax deduction of Rs.2.50 lakh per year.
- HUFs can claim up to Rs.1.50 lakh deduction under Section 80C for principal repayment of a home loan.
- They can also claim deductions under Section 24B for interest paid on a home loan.
- Under Section 54F, HUFs can claim tax deductions on long-term capital gains by investing in one residential house property, provided they don’t own more than one house at the time of sale.
- Gifts received up to Rs.50,000 are tax-free.
- It’s important to note that both the HUF and its members cannot claim deductions for the same investment or expense.
FAQs
How to Form an HUF?
- Step 1: Create HUF Deed Prepare the HUF Deed, which is a document that outlines the rules and guidelines of the HUF. It should include details of the Karta, coparceners, and other members of the family.
- Step 2: Apply for HUF PAN Card Obtain a PAN (Permanent Account Number) card for the HUF by applying to the Income Tax Department. The PAN card is essential for conducting financial transactions and filing tax returns on behalf of the HUF.
- Step 3: Open a Bank Account for the HUF Open a dedicated bank account in the name of the HUF. This account will be used to manage the financial transactions and funds of the HUF separately from individual members’ accounts.
Once these steps are completed, the HUF becomes a distinct legal entity. It can receive payments and hold assets in its name. Importantly, any income received by the HUF is taxed separately and not attributed to individual members of the HUF.
The table provided below is an organized overview of various aspects related to the formation and structure of a Hindu Undivided Family (HUF).
Family Formation | HUF cannot be formed by an individual; it can only be created by a family unit. |
Automatic Creation | HUF is automatically formed at the time of marriage. |
HUF Composition | A HUF consists of a common ancestor and all of their lineal descendants, including wives and unmarried daughters. |
Eligible Communities | Hindus, Buddhists, Jains, and Sikhs are eligible to form HUFs. |
Assets of HUF | Typically, HUF possesses assets acquired through gifts, wills, ancestral property, the sale of joint family property, or contributions made by HUF members to the common pool. |
Formal Registration | Once formed, the HUF must be formally registered in its name. This involves creating a legal deed that contains details of HUF members and the business activities of the HUF. |
PAN and Bank Account | The HUF should obtain a PAN number and open a dedicated bank account in the name of the HUF. |
Residential Status of HUF?
Resident: A HUF would be resident in India if the control and management of its affairs is situated wholly or partially in India.
Non-Resident: If the control and management is situated wholly outside India, it would become a non-resident.
Resident and ordinarily resident/ Resident but not ordinarily resident:
If Karta of resident HUF satisfies both the following additional conditions (as applicable in the case of an individual) then resident HUF will be resident and ordinarily resident; otherwise, it will be resident but not ordinarily resident.
- Karta of resident HUF should be resident in at least 2 previous years out of 10 years preceding the relevant previous year.
- The stay of Karta during 7 previous years immediately preceding the relevant previous year should be 730 days or more.