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All About HUF
*By forming a Hindu Undivided Family, you can optimize your tax liabilities and also include your family members to benefit in the future
*For the sake of income tax, the HUF is considered as a separate entity and is therefore taxed separately
*Although HUF is governed by the Hindu law board, it can be formed by Jain, Sikhs and Buddhists as well
*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
The Income Tax Act provides several opportunities for taxpayers to reduce their tax liabilities in an organized and legitimate manner. One such aspect is the creation of the HUF or the Hindu Undivided Family. 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. Senior most male member of the family would become ‘Karta’. Although it is governed by the Hindu law board, it can be formed by Jain, Sikhs and Buddhists as well.
For the sake of income tax, the HUF is considered as a separate entity and is therefore taxed separately. This helps to separate tax obligations of an individual from that of his family. The income tax slab for HUF is same as that of an individual, with an exemption limit of Rs 2.5 lacs and qualifies for all the tax benefits under Section 80C, 80D, 80G and so on. It also enjoys exemptions under Section 54 and 54F with respect to capital gains.
Creating an HUF
HUF has to be created keeping in mind the legal and financial requirements. A HUF is created through executing a deed, getting HUF PAN and opening a bank A/c in the name of HUF. The cost of creating a HUF is a few thousands of rupees. You next need to infuse 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 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.
Since the account is equivalent to an individual’s account there are various tax benefits and a few of them are mentioned below.
*According to IT act, tax rebates and deductions can be availed under sections 80C for HUF account.
*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 section 64(2) and 56(2) tax benefits can be enjoyed in such instance.
*Corpus can be used for investment in tax free money instruments.
Ways to reduce tax outgo with an HUF
*Rental Income from property: Rental income from a property could be received on behalf of a HUF instead of an individual account.
*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.
*Remuneration to Karta and members: Remuneration to Karta and other family members is an allowable deduction from income of an HUF.
*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.
*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.
HUF Checklist
*HUF will need to file return of income every year, considering every income which is received on its name. However, there is a clubbing provision which would hold the Karta liable for all the income which is diverted to HUF with intention to evade tax.
*Any asset which is contributed to the HUF will be treated as common asset and the asset owner must renounce the ownership in the name of HUF. Hence, if the previous owner wishes to sell such asset, then it cannot be done so without the consensus of all HUF members.
*Any addition to the family by birth or marriage will add a member to HUF. Hence, it may be very difficult to manage such a large HUF, while keeping appropriate records of asset and funds contributed to HUF and by HUF.
*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, female member can become Karta, but its tax aspects are not very clear.
*If any member of Karta transfers any property to HUF without any sufficient consideration, then it will be clubbed in the hands of such transferor.
*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, rather in hands of such wealth owner.
Documents Required
Pan and Aadhar of Kerta and Members of HUF
FAQS
What is the meaning of Hindu Undivided Family?
Hindu Undivided Family (“HUF”) which is same as joint Hindu family is a body consisting of persons lineally descendant from a common ancestor, including their wives and unmarried daughters, who are staying together jointly; joint in food, estate and worship. The daughter, on her marriage, ceases to be a member of her father’s HUF and becomes a member of her husband’s HUF.
What is a Hindu Coparcenary? In what ways is it different from a HUF?
A Hindu Coparcenary is a much narrower body within Hindu Undivided Family. Generally speaking, it is a body of individuals who acquires interest by birth in the joint family property. They are the son, grandson and great grandson of the holder of the joint property for the time being. The coparcenary, therefore, consists of a common male ancestor and his lineal descendants in the male line within 4 degrees, running from and including such ancestor. No coparcenary can commence without a common male ancestor though, after his death, it may consist of collaterals such as brothers, uncles, nephews etc. The essence of coparcenary is community of interest and unity of possession.
What is the difference between a co-parcener and a member?
A HUF, as such, can consist of a very large number of members including female members as well as distant blood relatives in the male line. However, out of this, coparceners are only those males who are within 4 degrees in lineal descendent from the common male ancestor. The relevance of concept of coparcenary is that only coparceners can ask for partition. The other male family members; i.e, other than coparceners in a HUF, have no direct claim over HUF property, but can claim only through the coparceners.
What are the advantages of HUF under Tax Laws?
The Income-tax Act, 1961 as well as Wealth-tax Act, 1957 recognise HUF as an independent assessable or taxable entity. This is done by specifically including “Hindu Undivided Family” in the definition of “person”, in section 2(31) of the Income-tax Act. As such, the income earned by such HUF will enjoy all exemptions and deductions; including the basic exemption from income-tax, so far as applicable.
How a HUF can be created ? Who can be members of a HUF?
HUF is a creature of law. It cannot be “created” by act of parties, except in rare cases of adoption and reunion. Birth of a son in a Hindu joint family automatically makes him a member of the HUF. In view of this, all male members automatically become members of the HUF. In addition to that, if a child is adopted, then he also becomes a member of the HUF. Similarly, in case of reunion of erstwhile HUF family members, such reunited members become members of the reunited HUF. Moreover, upon marriage, wife becomes a member of her husband’s joint family.
Which are the states in which HUF is not recognized?
Kerala is the State in which the HUF is not recognized. This is done by Kerala Joint Family System (Abolition) Act, 1975 with effect from 01.12.1976.
Is a HUF necessarily resident in India?
No. Section 6 of the Income-tax Act, 1961 clearly contemplates a situation where a HUF can be non-resident also. In fact, HUF can also be Not Ordinarily Resident. A HUF will be considered to be resident in India unless, during the previous year, the control and management of its affairs is situated wholly outside India. In such a case, it will be treated as non-resident HUF. Moreover, in case of a HUF whose manager has not been resident in India in nine out of ten previous years preceding the previous year or has, during the seven previous years preceding that year, been in India for a total 729 days or less, such HUF is to be regarded as Not Ordinarily Resident within the meaning of the Income-tax Act, 1961. As such, it is not necessary for a HUF to be resident in India.
An HUF is having all the properties in India. The Karta of the HUF is residing outside India permanently and the female members are staying in India and are managing the affairs of the HUF. What would be the status of such HUF?
As discussed in the earlier answer, the test is not where the Karta resides, the test is where the control and management of the affairs of HUF is situated. Even if a part of control and management is situated in India, such HUF will be treated as resident in India. Though, generally, Karta is supposed to manage the affairs of HUF, it is not an absolute rule and, by consent, the power of control and management may be delegated to other members of the family, either fully or partially.
As such, in this case, the status of HUF would be resident in India.
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