HUF is a separate legal entity from its members and is created primarily to save taxes on income. As per Hindu law, a HUF consists of all people from a common ancestor. Their wives and unmarried daughters are also a part of HUF.
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.
What are the HUF Account Rules?
- An individual cannot form it, and you need a family.
- Marriage automatically results in the creation of a HUF
- HUF includes the descendants of a common ancestor, their unmarried daughters, and their wives.
- HUF can be formed by Hindus, Sikhs, Jains and Buddhists
- After the formation of HUF, it should be registered formally with a legal deed, PAN number, and bank account. The deed should also mention the details of HUF members and its business.
- Every member can deposit their income in the common HUF corpus.
- The members can claim benefits under various sections.
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.
What are the Tax Benefits of Forming a HUF?
- Income Tax Benefits: Since a HUF is a separate legal entity from its members and holds a separate PAN, it can generate income, run its own business, and make investments in shares, property, etc. Along with this, it can also avail of the basic exemption limit of 2.5 lakhs.
- Own a Residential House: As per the Indian Income Tax Act, if you possess more than one residential, self-occupied property, only one is considered self-occupied, and you have to pay tax on the remaining properties. A HUF can own a residential house without paying any tax. Therefore, by registering for HUF, you can own more than one residential property without paying taxes.
- Life Insurance: Just like individuals can avail of a deduction of Rs.1,50,000 on investments in certain schemes and life insurance premiums, HUFs can also avail of a benefit of Rs.1,50,000 under section 80C.
- Investment: An HUF can also invest in tax-saving schemes like ELSS and earn tax benefits up to Rs.1,50,000 under section 80C.
- Health Insurance: You get a deduction of Rs.25,000 annually on the health insurance premium paid for your family under section 80D. However, this deduction can seem insufficient with the rising premiums. A HUF can claim an additional deduction of Rs.25,000, making the total health insurance premium deduction to be Rs.50,000.
Disadvantage of forming an HUF
- Equal Rights on Assets: All family members have equal rights to the family assets, which can lead to complications when consent is needed for asset sale or distribution. Disputes may arise among family members regarding the management and division of assets, leading to conflicts and legal battles.
- Complexity in Dissolution: Closing an HUF can be complicated, with legal and logistical challenges involved in asset distribution among family members. This process can be time-consuming and expensive, especially if there are disagreements among family members regarding the division of assets.
- Decreasing Relevance: With the shift from joint families to nuclear families, the relevance and importance of HUF as a tax-saving tool are declining. In today’s modern society, where nuclear families are more common, the benefits of the HUF structure may not be as significant as they once were.
- Disputes and Divorces: Cases of disputes and divorces within the family further complicate the situation, diluting the benefits of the HUF structure. In such situations, it can be challenging to manage and distribute assets fairly among family members, leading to additional legal and emotional complications.
FAQs
Can a HUF get Senior Citizen Benefits?
While the members of HUF above the age of 60 years can avail of senior citizen benefits individually, the HUF cannot avail of any benefit that is available to the senior citizens. For example, the Karta (senior citizen) can get a health insurance premium deduction of 50,000, but the HUF can only avail of a deduction of Rs.25,000.
Is income from HUF taxable?
Yes, the income earned under HUF is taxable as per the applicable slab rates for individuals. A HUF can avail of the same deductions as any other individual. It includes a basic exemption of Rs.2.5 lakh and other deductions under sections 80C, 80D, 80TTA, 80G, etc.