Hindu Undivided Family or HUF is one of the most popular methods of saving taxes in India. However, there are many points on which people still have doubts regarding this concept. Therefore, in today’s article, we would be discussing everything about the HUF. So, let’s get started:
1. How to Save Taxes by forming HUF?
In India, there are many families which are undivided and the incomes earned by such families are joint income (and not considered individual incomes). These joint incomes cannot be taxed in the hands of any specific individual and are therefore taxed in the hands of the whole family.
As these are taxed in the hands of the family, the family has a separate PAN Card from that of Individual members of the HUF who also have a separate PAN Card.
The HUF is also taxed as per the Slab Rates and also it becomes eligible for various tax deductions from sections 80C to 80U.
Therefore, by creating HUF, we could get the benefit of slab rates and deductions twice viz. one as Individual taxpayers and second as a HUF. Hence, all of those incomes which are covered under the family (i.e. HUF) name would be taxed separately and therefore it would result in saving of taxes.
2. Who are “Co-Parceners” and “Members” in HUF?
- 1. Mr. X (Karta)
- 2. Son/ Daughter of Mr. X
- 3. Grandson/Granddaughter of Mr. X
- 4. Great Grandson/ Great Granddaughter of Mr. X
[Note: HUF can’t be expanded over the above 4 lineal descendant lines]
However, a person who is adopted into the family also becomes its coparcener from adoption though not born in the family. As per the amended law since 2005, even a girl child becomes a coparcener by birth and can continue to be a co-parcener of her father’s HUF even after her marriage. However, she will only be a member of her husband’s HUF.
[B]. Members of HUF: Any other distant Relatives who are not a family members (e.g. Brother-in-law, Sister-in-law, etc.) would be deemed as Members of HUF. Although they are Members of HUF, they are not Co-Parceners.
Members have the right to be maintained out of the funds of HUF and receive their share at the time of partition but do not have the right to seek for partition or become the Karta.
[Imp. Note: Wife is not considered as the direct part of HUF i.e. Co-Parcener. She will be a Member in Husband’s family HUF. Although, She will be a Co-Parcener in her Father’s Property. ALL CO-PARCENERS ARE MEMBERS, BUT ALL MEMBERS ARE NOT CO-PARCENER.]
3. Structure of HUF and who can form it:
By forming a HUF, you can optimize your tax liabilities and also include your family members to benefit in the future. Although HUF is governed by the Hindu law board, it can be formed by Jains, Sikhs, and Buddhists as well.
HUF is governed under Hindu law board and could be formed by a married couple or by members of a joint family. HUF could be formed by two members and at least one among them should be a male member of the family.
The senior most male member of the family would become ‘Karta’.
For the sake of income tax, the HUF is considered as a separate entity and is therefore taxed separately. This helps to separate the tax obligations of an individual from that of his family. The income tax slab for HUF is the same as that of an individual, with an exemption limit of Rs 2.5 lakh, and qualifies for all the tax benefits under Section 80C, 80D, 80G, and so on. It also enjoys exemptions under Sections 54 and 54F with respect to capital gains.
Shutting down the HUF is a difficult process and hence it is impossible to proceed with unless all the HUF members agree to the partition.
4. Corpus Fund for HUF (viz. Initial Capital):
- Assets received as gifts by HUF (Relatives or non-relatives). Gifts from non-relative should not exceed Rs 50,000.
- Assets passed on by will that favor HUF
- Common ancestral property
- Property acquired from the sale of joint family property
- Assets received on the partition of a larger HUF of which the coparcener was a member (like a HUF in which the coparcener’s father or grandfather was the Karta)
5. Step for Creating an HUF:
A HUF is created by executing a deed, getting HUF PAN, and opening a bank A/c in the name of HUF.
You next need to introduce capital to form the HUF corpus with money received as gifts from relatives or with assets received under a will or inheritance, as it enjoys tax exemption.
Care should be taken that personal assets and funds are not transferred to the HUF account, as income generated from it shall later be clubbed under personal income under Section 64 (2).
The Karta of a HUF is the senior most male member of the family and in financial terms, he can also be called the “Manager” of the family.
In this account, a corpus is created where every family member can pool their income. The corpus will be handled by or authorized to handle by Karta (head of the family). Signature of Karta will be required for every transaction from the bank.
These accounts are similar to individual saving bank accounts; there will be various tax benefits that are available for an individual’s account while the income of members is being pooled in the HUF account.
6. Documents required for opening an HUF account:
(a). HUF will have a unique PAN card; this PAN card along with the PAN of Karta should be produced
(b). A declaration form will be provided where every member has to make a sign stating the name of Karta and declare.
(c). They are the only members of HUF. Karta is to have sole authority over the HUF account.
(d). Every transaction on behalf of the HUF account, made by each member of the family is governed by Karta.
(e). Residential & Identification proof of Karta
(f). There can be other documents or conditions depending on the bank where HUF account is opened
7. Benefits and Drawbacks of forming an HUF:
[I]. Benefits of creating a HUF:
Since the account is equivalent to an individual’s account there are various HUF tax benefits and a few of them are mentioned below:
a). Tax Benefits: According to Income Tax Act, the income tax slab for HUF is the same as that of an individual, with an exemption limit of Rs 2.5 lakh, and qualifies for all the tax benefits under Section 80C, 80D, 80G, and so on. It also enjoys exemptions under Sections 54 and 54F with respect to capital gains.
For Example – If there are 3 members in a family and the income of each family member’s income exceeds Rs 10 lacs. Further, the family has a let-out ancestral property from which it receives rental income amounting to Rs 10 lacs.
Now ignoring any deductions if such income is taxed in hands of any family member it shall be taxed at 30%. However, if such income is shown in hands of HUF then there shall be an exemption up to Rs 2.5 lacs i.e., savings of Rs 75,000.
Then further for income ranging between 2.5-5 lacs tax rate shall be 5% instead of 30% (i.e., tax savings of 25% amounting to Rs 62,500) if the income would have been taxed in the hands of any family member.
Just like an individual HUF can claim the gross annual value of a self-occupied property as NIL. The HUF is also entitled to claim a deduction for interest on self-occupied house property of Rs. 2,00,000 u/s 24(b) of the Income tax act,1961 in a year.
The HUF can also let out its property to any person and interest on loan paid deduction can be availed without any limit, in respect of the said property.
HUF being assessable as a separate person under the Income tax act, 1961 can avail separate deductions under Section-80C up to Rs 1.5 lacs, Mediclaim for family members under Section-80D up to Rs 25,000 and in case any member is a senior citizen Up to Rs 50,000, u/s 80TTA up to Rs 10,000 and for senior citizens up to Rs 50,000.
Therefore, these deductions can be claimed irrespective of the individual deductions of members since two pan cards can be applied and an individual can file two income tax returns, one in his personal/individual capacity and secondly in the name of the HUF.
b). Gift Exemptions: Gifts collected up to a worth of Rs 50,000 will be tax-free. A father who owns a HUF account can gift a property or money of higher worth to a son who owns a smaller HUF account, but he should specify that the gift is for the son’s HUF and not to him as an individual. Under sections 64(2) and 56(2), tax benefits can be enjoyed in such instances.
c). Allocation of Income under HUF Name: Although salaried individuals cannot divert their salary into the HUF, they can benefit if they plan to earn additional income, which they can claim in the name of a HUF, thereby reducing their taxable income.
For example: If an individual has a salary income of Rs 12 lakh and is earning an additional business income of Rs 6 lakh. Under normal circumstances, the entire 18 Lakhs would be taxed under the individual’s name and therefore the 6 lakhs business income would also be taxed at a higher slab.
Now, if he creates HUF and does business in HUF name, then Rs. 6 lakhs income will be taxable under HUF and he could reduce his tax liability after availing benefits under various sections which would otherwise not be allowed, had he earned it in his own name.
d). Investing Corpus Funds: Corpus can be used for investment in tax-free money instruments.
[II]. Disadvantage of HUF account:
Under HUF, once the assets are transferred to HUF, the asset becomes the property of all members and not of a specific individual. All members of the family have a right in the assets of the HUF (including an unborn child in the womb of a mother). Now because of this, there can be a strong sense of insecurity among members.
If any of the members of HUF is willing to partition then the process of partition in deposit in the HUF account can turn out to be tedious.
8. Ways to reduce tax outgo with a HUF:
a). Rental Income from the property: Rental income from a property could be received on behalf of a HUF instead of an individual account.
b). Business Income: Profits generated out of the family business, in the name of a HUF, shall be taxed accordingly and exemptions will give more leverage on tax saving.
c). Remuneration to Karta and members: Remuneration to Karta and other family members is an allowable deduction from the income of an HUF.
d). Loan to HUF members: If the business, capital or investment of the HUF is expanding, then such expansion can be done in the individual names of the members of HUF by giving loans to the members from the HUF. The HUF may or may not charge interest on the loans given.
e). Family Settlement or Arrangement: The sole purpose of the family settlement should be to settle existing or future disputes regarding property, amongst the members of the family. Since this arrangement does not involve transfer, it would not attract gift tax, capital gains tax or clubbing. In a family arrangement, tax incidence is considerably reduced or it may even become nil.
9. Other Relevant Points regarding HUF:
(i). HUF is also required to file an income tax return every year just like an Individual and if the income/turnover of the business of the HUF is more than Rs. 25 Lakhs/ Rs. 1 Crore, tax audit u/s 44AB would also be required to be conducted by a Chartered Accountant.
(ii). However, there is a clubbing provision that would hold Karta liable for all the income which is diverted to HUF with the intention to evade tax.
(iii). The due date for filing of income tax return of the HUF would be 31st July of the Assessment Year. However, in case the Tax Audit is required to be conducted, the Due Date for filing of Return would be 31sh October.
(iv). Shutting down the HUF is a difficult process and hence it is impossible to proceed with unless all the HUF members agree to the partition. Where there is no male member, a female member can become Karta, but its tax aspects are not very clear.
(v). An adopted child can become a member of the HUF but he cannot become a co-parcener. The difference between a member and a co-parcener is that the member cannot ask for a partition of the HUF.
(vi). HUFs are recognized all over India except Kerala wherein HUFs are not recognized. This de-recognition was done by with effect from 01.12.1976.
(vii). The HUF may be a resident or a non-resident in India depending on where the control of the HUF is residing.
(viii). If any member of Karta transfers any property to HUF without any sufficient consideration, then it will be clubbed in the hands of the such transferor.
(ix). Where any woman has any wealth which she brought in from her maiden home, the income from the same would not be taxable as income of HUF, but rather in hands of such wealth owner.
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