The formation of a Hindu Undivided Family or an HUF is quite common in India for income tax-saving purposes. This guide will help you understand the concept of HUF, how it helps you save taxes and the rules and regulations governing HUFs in India.
What is an HUF?
The abbreviation HUF stands for ‘Hindu Undivided Family’. An HUF, under the Hindu law, is a family consisting of lineal descendants from a common ancestor. It includes their wives and unmarried daughters. A Hindu Undivided Family cannot be created under a contract. It is created automatically in a Hindu family. Apart from Hindus, Jain, Sikh and Buddhist families can also create an HUF.
What does an HUF consist of?
An HUF can include three generations of a family and all its members. It consists of the karta, typically the male head of the family, along with the coparceners. Daughters continue to be coparceners in their father’s HUF even after marriage. They become a member of their husband’s HUF, too.
Read our guides on Karta & coparcener.
Role of women in an HUF
Daughters become the coparceners in an HUF since birth, just like sons. Consequently, they have the same rights and duties as the sons in an HUF. This means that they can demand their share of HUF properties. This change in daughter’s rights was brought about by an amendment in the Hindu Succession Act in 2005. Before that, daughters were members of an HUF, but not coparceners.
It is important to note that women who join an HUF through matrimony are members and not coparceners.
See also: Hindu Succession Act 2005
Can a woman be the Karta of an HUF?
In a landmark judgement, the Delhi High Court in 2016 ruled that eldest members of an HUF can be its Karta. “If a male member of a Hindu Undivided Family by virtue of being the first born can be a Karta, so can a female member. The court finds no restriction in law preventing the eldest female co-parcener of an HUF from being its Karta,” the HC said.
However, in the absence of a clear provision, income tax authorities continue to rule against women becoming the Karta of HUFs. The legal position is that the eldest son of a man becomes the Karta of an HUF after his father’s demise. In case the son is a minor, his window can oversee the HUF business till the sons comes of age.
How to create an HUF?
An HUF gets formed automatically after the marriage of an individual, which is considered the start of a family. However, it would be legally accepted only when a deed of HUF is drafted and executed following due procedure. This can be done at any point in time.
Process to create an HUF
Step 1: Write an HUF deed
Written on a stamp paper, an HUF deed states the names of the HUF’s karta, coparceners and members.
Step 2: Apply for an HUF PAN card
Use Form 49A to apply for a PAN card at the NSDL website.
Step 3: Open an HUF bank account
All monies received and spent by the HUF must be sourced through this account.
Residential status of an HUF
Under the income tax law, an HUF can have any one of the following residential statuses:
(1) Resident and ordinarily resident in India
(2) Resident but not ordinarily resident in India
A legal entity, an HUF can own property, movable as well as immovable, in its name. However, a property belonging to an HUF belongs to all the members.
How is an HUF taxed?
The income earned by members of an HUF belongs to the entire family and not to an individual. This is why the income is taxed in the name of the HUF and not for individual members.
An HUF is treated as a ‘person’ under Section 2(31) of the Income Tax Act, 1961. It has a PAN card and files its taxes separately and independently from its members. An HUF is taxed at the same rate as an individual under the Indian income tax law.
However, for an HUF to be taxed in that capacity, it must fulfil two conditions:
It should have coparceners.
It should have a joint family property, which consists of ancestral property, property acquired with the help of ancestral property and property transferred by its members.
See also: Implications if a HUF is abolished as a tax unit
How does forming an HUF help in tax-saving?
Hindu undivided families are treated as a separate entity under the income tax law in India and are thus offered additional tax benefits to a family. These benefits are over and above the tax deductions allowed to individual members of the HUF.
Since an HUF is taxed independently from its members, it is eligible for claiming income tax deductions of its own, including those offered under Section 80 C. An HUF can also claim deductions under Section 54, Section 54B, Section 54D, Section 54EC, Section 54F, Section 54G and Section 47.
All resident and non-resident HUFs in India enjoy a standard tax deduction of Rs 2.50 lakh in a year.
HUF can claim deduction of up to Rs 1.50 lakh under Section 80C for home loan principal repayment.
They can claim deduction under Section 24B for home loan interest paid.
Under Section 54F, an HUF can claim tax deduction on long-term capital gains on sale of any asset other than a residential house by investing the proceeds in one residential house property. But, the taxpayer should not own more than one house on the date of sale to claim the exemption.
Gifts collected up to a worth of Rs 50,000 will be tax free.
However, the members and the HUF cannot claim a deduction for the same investment or expense.
It can run its own business to generate income.
It can invest in the market.
HUFs enjoy a basic tax exemption of Rs 2.5 lakhs.
It can own a residential house without having to pay taxes.
It can avail of a home loan.
One can claim an additional tax deduction of Rs 25,000 on premiums paid towards health insurance of members of the HUF. This limit increases to Rs 50,000 if the member is a senior citizen.
Once a joint family’s income is assessed as an HUF, it will continue to be so until the coparceners opt for a partition.
Shutting down an HUF can be complex, since it requires the consent of all the members of the Hindu Undivided Family.
The karta has more powers than coparceners or members.
New members that join the family by way of birth or marriage, have an equal share in the HUF property. This is even true of an unborn child.
In case an HUF is dissolved and its assets sold, each member will have to pay taxes on the profit they receive. The income tax law views this gain as their income.
Coparceners of an HUF cannot gift or transfer their rights in the assets of the HUF during their lifetime. They can, however, bequeath their share in the HUF assets through a Will.
In case a coparcener dies without leaving a will, their share in the HUF property will pass on to the Class-1 heirs, mentioned in the Hindu Succession Act.
Impact of Uniform Civil Code on HUFs
Media reports say that the government may table the Uniform Civil Code (UCC) in the upcoming Monsoon Session of Parliament. The Code aims to formulate and implement personal laws of citizens which apply to all citizens equally regardless of their religion, sex, gender and sexual orientation. If the UCC is implemented, the concept of HUF will end.
Section 56(2)(VII) not applicable to individuals receiving money from HUFs as members: ITAT
May 23, 2023: Section 56(2) (VII) is not applicable to individual receiving money from an HUF as its member, the Surat Bench of the Income Tax Appellate Tribunal (ITAT) has recently ruled. Section 56 establishes the rules for taxing income from other sources. Section 56(2)(vii) says that money received in the excess of Rs 50,000 by an individual or a HUF receives in any previous year is taxable under the head income from other sources.
Who is a karta?
A karta is the head of an HUF, typically the eldest male member of the said family.
What is meant by coparcener?
A coparcener is a person who inherits an estate as a co-heir with others. Under the Hindu succession law, a coparcener is a person who assumes a legal right in his ancestral property by birth.
Can a woman be the karta of an HUF?
Yes, a woman can be the karta of an HUF after a landmark judgment by the Delhi High Court in 2016.
What is an HUF account?
Those forming an HUF have to open a separate bank account, which should reflect the earnings and expenses of the HUF.
What is meant by HUF in income tax?
An HUF helps a joint family save on taxes by providing various tax deductions.
Who is eligible for an HUF?
A family, with coparceners who own properties, is eligible to be taxed as an HUF under Indian income tax regulations.
What is the purpose of an HUF?
The purpose of an HUF is tax saving.
What is meant by a Hindu undivided family?
An HUF is a family lineally descended from a common ancestor. These members includes their wives and unmarried daughters.
What is an example of a HUF?
Reliance Industries, Tata Sons, Mahindra & Mahindra, Haldiram’s, etc., are some of the examples of HUFs.
Who are included in an HUF?
An HUF consists of a husband and wife, their sons, their unmarried daughters, and their sons’ wives and children.
Which religion the concept of an HUF include?
Hindu, Buddhist, Jain and Sikh families can form HUFs.
Are Muslims included in an HUF?
No, Muslim families cannot form an HUF.