A Detailed Guide of HUF in 2024 – Hindu Undivided Family & It’s Features

What is an HUF?

Understanding the Dynamics of Hindu Undivided Family (HUF) for Tax Savings

Full Form of HUF is Hindu Undivided Family. Hindu Undivided Family (HUF) is a unique taxation concept in India that provides families, including Hindus, Buddhists, Jains, and Sikhs, with a means to collectively manage their income and assets for tax benefits. Recognized as a separate legal entity under the Income-tax Act of 1961, HUF allows families to pool their resources and create a joint unit that is taxed independently.

Legal Framework and Composition

According to Hindu Law, an HUF consists of individuals lineally descended from a common ancestor, along with their wives and unmarried daughters. Interestingly, even Jain and Sikh families, not governed by Hindu Law, can establish HUFs under the Income-tax Act. This legal framework automatically creates an HUF within Hindu families and plays a crucial role in managing joint income.

Coparceners – defined as male descendants and their wives and unmarried daughters, form the core of an HUF. Additionally, distant relatives like brothers-in-law and sisters-in-law can be deemed members. The coparceners share equal rights in the inheritance of an undivided estate, and the HUF cannot be transferred, sold, or partitioned without the unanimous consent of all coparceners.

Formation and Recognition

To form an HUF, a minimum of two family members is required, and the entity is granted a separate PAN card and a bank account. The Income Tax Act and Wealth Tax Act treat the HUF as an independent entity, allowing it to file a separate tax return. This separation enables HUFs to enjoy various deductions and exemptions under the Income Tax Act, freeing them from the individual income and tax liabilities of their members.

It is important to note that HUFs can be formed by Hindus, including dissenters like Brahmo Samajists, Arya Samajists, Virashaivas, Lingayats, Prarthna Samajists, Jains, Sikhs, and Buddhists. However, Muslim or Christian families are ineligible to form HUFs. Notably, the HUF is not recognized in the state of Kerala, where the Joint Family System Act of 1975 abolished HUF laws.

TAX Implications of HUF

Hindu Undivided Family (HUF) emerges as a distinct taxation entity, offering families an avenue to optimize deductions and exemptions under tax laws. Taxed separately from its members, an HUF allows each family member, including spouses and children, to individually claim benefits like Section 80C deductions. This collaborative tax strategy becomes particularly advantageous when building assets collectively.

Operating Mechanism and Tax Benefits of HUF

Operating with its own PAN and filing a separate tax return, an HUF establishes a separate entity for joint Hindu family businesses. Beyond claiming deductions under Section 80, HUFs can explore various avenues, such as investing in insurance policies on members’ lives, paying salaries to contributing members (deductible from HUF income), and making investments with taxable returns.

Taxability of HUF

Examining the taxability of HUF, income computation involves assessing different heads of income, excluding exemptions under sections 10 to 13A of the Income-tax Act. Notably, if HUF funds are invested in a company or firm, remuneration received by a member as a director or partner may be considered HUF income. However, personal services rendered by a member are treated as the member’s personal income.

Certain incomes, such as converted self-acquired property, impartible estate income, personal income of members, “Stridhan” (woman’s absolute property), and individual property of daughters vested into HUF, are not taxed as HUF income. Deductions under Chapter VI-A are applicable, and HUFs are taxed at the same slab rates as individuals. Additionally, HUFs may be subject to Alternate Minimum Tax if the payable tax is less than 18.5% of the “Adjusted Total Income,” following specified conditions.

Illustration of TAX Calculation with and without HUF

Scenario: Mr. Rajesh’s Tax Optimization

Imagine a scenario where an individual, Mr. Rajesh, takes the strategic step of establishing a Hindu Undivided Family (HUF), incorporating his wife, son, and daughter after the demise of his father. The father’s property, in the absence of siblings, is seamlessly transferred under the HUF structure.

Now, let’s delve into the tax implications by considering the annual rent of the father’s property as Rs. 8 lakhs, and Mr. Rajesh’s salary income at Rs. 20 lakhs. The tax savings unfold as follows:

Income from Different Sources	Income of Mr. Rajesh before creating HUF	Income of Mr. Rajesh after creating HUF	HUF Income
Salary	Rs. 20 lakhs	Rs. 20 lakhs	–
Property Rent	Rs. 8 lakhs	–	Rs. 8 lakhs
Standard Deduction on Property	Rs. 2.4 lakhs	–	Rs. 2.4 lakhs
Income from Property	Rs. 5.6 lakhs	–	Rs. 5.6 lakhs
Total Taxable Income	Rs. 25.6 lakhs	Rs. 20 lakhs	Rs. 5.6 lakhs
Section 80C	Rs. 1.5 lakhs	Rs. 1.5 lakhs	Rs. 1.5 lakhs
Net Taxable Income	Rs. 24.1 lakhs	Rs. 18.5 lakhs	Rs. 5.6 lakhs
Tax Payable	Rs. 5,79,600	Rs. 4,07,720	Rs. 7,200
Total Tax Paid by Mr. Rajesh & HUF	Rs. 4,15,920	–	–
Tax Savings after creating HUF	Rs. 1,64,680	–	–

Both Mr. Rajesh and the HUF, inclusive of other members, can leverage tax deduction under Section 80C, contributing to substantial tax savings. In this strategic financial move, Mr. Rajesh optimizes his tax liabilities, demonstrating the potential benefits that arise from thoughtful HUF consideration.

How to Form an HUF & HUF Bank Account Process

Conditions for Forming HUF:

While the tax benefits of HUF are enticing, adherence to certain conditions is crucial:

• Family Formation: Only a family, not an individual, can form an HUF.
• Automatic Creation: HUF is automatically created at the time of marriage.
• Membership Inclusion: HUF comprises a common ancestor, all lineal descendants, including wives and unmarried daughters.
• Eligible Communities: Hindus, Buddhists, Jains, and Sikhs can form HUFs.
• Asset Sources: HUF typically accumulates assets through gifts, wills, ancestral property, or contributions from joint family property sales.

Formation Process – Step by Step:

Step 1 – Declaration of Creation of HUF:

• Form a Deed on a Stamp Paper, declaring names of Karta and Coparcener.
• The Deed serves as proof of entity existence and can be registered for added security.
• A simple one-page letter on a stamp paper is signed by the Karta and Coparceners.

Step 2 – HUF PAN Card:

• After forming the deed, obtain a PAN Card for HUF.
• Apply using Form 49A, indicating the Karta’s full name followed by ‘HUF.’
• Required documents include proof of identity, address, date of birth, and the HUF Formation Deed.

Step 3 – HUF Bank Account:

• Open a separate bank account strictly for HUF purposes.
• Every family member can deposit their income into this common corpus account.
• The account, operated by the Karta, includes its own debit card, cheque book, and internet banking.

Step 4 – HUF Demat & HUF Trading Account:

• Required for investments in the stock market, mutual funds, and managing securities.
• Operated and managed by the Karta on behalf of HUF members.
• Documents required include HUF PAN card, residential proof of Karta, identification proof of Karta, and a declaration form provided by the bank.

Benefits of HUF

Advantages of HUF:

Tax Savings through Extra PAN Card:

Forming an HUF allows for an additional PAN card in the family’s name, creating a legal avenue for tax savings.

Property Management:

HUF facilitates the seamless management of jointly owned or inherited property, enabling activities like purchase, sale, rent, and lease.

Income Consolidation:

Income from assets under HUF accrues to the entity, reducing the tax liability of individual family members who would otherwise report the income personally.

Tax Slabs and Benefits:

HUF adheres to the same tax slabs as an individual, qualifying for benefits under Section 80C, 80D, 80G, 80L, and more. Exemptions under Sections 54 and 54F provide relief with respect to capital gains.

Deductions for House Property:

HUF can claim deductions for interest on self-occupied house property, providing a tax advantage as per Section 24 of the Income-tax Act.

Demat and Trading Account Benefits:

HUF’s demat and trading account offer opportunities for IPO participation, buybacks, and stock market investments in the family’s name.

Tax Benefits – A Key Advantage:

Section 80C Deductions:

HUF account holders can avail tax deductions under Section 80C, enhancing their overall tax planning strategy.

Tax-Free Gifts:

Gifts up to Rs 50,000 are tax-free. HUF members can leverage this by gifting property or money, enjoying benefits under sections 64(2) and 56(2).

Corpus for Tax-Free Instruments:

The HUF corpus can be utilized for investments in tax-free financial instruments, further optimizing tax benefits.

Additional HUF Advantages:

Separate Tax Filing:

HUF members file taxes separately, providing opportunities for tax benefits and savings.

Management and Control:

The head of the HUF holds decision-making authority, simplifying the financial decision-making process for the family.

Inclusivity:

Adopted children are eligible to become members of the HUF, ensuring inclusivity within the family structure.

Legal Recognition:

The HUF structure is recognized throughout India, except in Kerala, offering legal validity to the family’s financial transactions.

Financial Support:

Members can easily access loans under the HUF entity, providing financial support when needed.

Disadvantages of HUF

Equal Rights on Assets:

All family members have equal rights to family assets, leading to complications when consensus is required for asset sale or distribution.

Complexity in Dissolution:

Closing a HUF can be intricate, involving legal and logistical challenges in distributing assets among family members.

Decreasing Relevance:

The shift from joint families to nuclear families diminishes the significance of HUF as a tax-saving tool. Disputes and divorces further erode the benefits of the HUF structure.

Drawbacks of HUF

Equal Rights of Members:

The major drawback of forming an HUF is that all members possess equal rights to the property. Sale of common property requires unanimous agreement, and additions to the family result in new members with equal rights, potentially making the HUF challenging to manage.

Partition Challenges:

Dissolving a HUF involves a partition, requiring unanimous agreement among members. This process can lead to disputes and legal complications as assets are distributed.

Relevance Decline in Modern Times:

With the prevalence of nuclear families, HUF’s status as a separate taxable entity is diminishing. Increasing divorce rates contribute to the declining importance of HUF as a tax-saving vehicle.

Continued Assessment Until Partition:

Once formed, a HUF must continue filing tax returns until a partition occurs. Claiming partition involves notifying the assessing officer, leading to an enquiry. Income from partitioned property is taxed as individual income, impacting the taxation of subsequent HUFs.

---

HUF Creation Deed Format

DECLARATION I, ________________ son Of __________________ Residing at ______________________ aged ___Adult do hereby declare

1. That I am Karta of ___________________________________________ .

2.That I received on behalf of the H U F gift of Rs. ___________ by way of CASH/CHEAUE from my FATHER ___________________________(name of relative of karta of HUF) on dt. _______________ this formed the corpus of the HUF.

3. That the HUF at present is consisting of the followings members- I) Shri _____________________, Adult, Residing at _________________ II) Smt. _____________________, Adult, Residing at _________________ III) Kumari _________________-Minor, Residing at ___________________

4. That the above statements are true to the best of my knowledge & belief. Declare this on

_________________

WITNESS: Signature

1. ————————————– (_____________________)

2. ————————————– (_____________________)

HUF Gift Deed Format

[To be executed on Rs. 100 Stamp Paper] DECLARATION OF GIFT MADE BY ________________________ TO THE HINDU UNDIVIDED FAMILY OF ___________________ I,_____________________________, residing at_________________________________________________, do hereby declare and affirm as under:

1. That out of natural love and affection borne by me towards the Hindu Undivided Family of_______________, I have made a gift of Rs.______ (Rupees _________________ only) as per the following details: By Cheque No.________, dated __________, drawn on Bank ____________________, ________________ Branch, in favour of ________________________ HUF.

2. The above Gift has been duly accepted by ________________________, as Karta of his Hindu Undivided Family and has been duly acknowledged hereunder.

3. This Declaration of Gift is made to record the fact that I have made this Gift in favour of the Donee as above, who now has the absolute right, title and interest in the gifted amount. Date: ___________, 200__

___________________ (Signature of the Donor)

ACKNOWLEDGEMENT OF GIFT I, ________________________, hereby acknowledge having received the above gift made to my Hindu Undivided Family by _________________________. Date: ___________, 200__ ___________________ (Signature of the Donee as Karta of his HUF) •

RBI circular link of HUF accounts : https://www.rbi.org.in/commonperson/English/Scripts/Notification.aspx?Id=949

FAQ – Hindu Undivided Family (HUF)

Related Article : Unclaimed Deposits – RBI Udgam portal