Hindu Undivided Family (HUF) Tax Benefits: 1. What Is A HUF?

Hindu Undivided Family (HUF) Tax Benefits
1. What is a HUF?
2. Tax implications of forming a HUF
o How to save tax by forming an HUF?
o How is HUF taxed?
3. How to form an HUF?
4. Disadvantage of forming an HUF
5. Frequently Asked Questions
1. 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 a
HUF. HUF has its own PAN and files tax returns independent of its members.
2. Tax implications of forming a HUF

How to save tax by forming an HUF?
A HUF is taxed separately from its members, therefore, deductions (such as under Section 80) or exemptions allowed under the tax
laws can be claimed by it separately. For example, if you and your spouse along with your 2 children decide to create a HUF, all 4 of
you as well as the HUF can claim a deduction for Section 80C. HUF is usually used by families as a means to build assets. Let’s
understand in detail.
How is HUF taxed?

 HUF has its own PAN and files a separate tax return. A separate joint Hindu family business is created since it has an
entity separate from its members.
 Deductions under section 80 and other exemptions can be claimed by the HUF in its income tax return.
 HUF can take an insurance policy on the life of its members.
 HUF can pay a salary to its members if they contribute to its functioning of the HUF. This salary expense can be deducted
from the income of HUF.
 Investments can be made from HUF’s income. Any returns from these investments are taxable in the hands of the HUF.
 A HUF is taxed at the same rates as an individual.
 Let’s understand a HUF is taxed with an example – After the death of his father, Mr Rajesh Chopra decides to start a HUF
with his wife, son, and daughter as members. Since Mr Chopra had no siblings, the property held by his father was
transferred in the name of the HUF. The property held by late Mr Chopra earns an annual rent of Rs 7.5 lakhs. Mr Rajesh
Chopra has an income from salary of Rs 20 lakh. By creating a HUF, Mr Chopra can save tax, see below.
Income from Income of Mr. Income of Mr. Income of

various sources Chopra before Chopra after HUF
formation of HUF formation of HUF
Salary 20,00,000 20,00,000
House property 7,50,000 – 7,50,000

rent
Standard 2,25,000 – 2,25,000

deduction on
house property
Income from 5,25,000 – 5,25,000

house property
Total taxable 25,25,000 20,00,000 5,25,000

income
Section 80C 1,50,000 1,50,000 1,50,000
Net taxable 23,75,000 18,50,000 3,75,000

income
Tax payable 5,53,625 3,91,400 7,725
Total tax paid by Mr. Chopra & HUF 3,99,125
Tax saving due to forming an HUF 1,54,500
Due to this tax arrangement, Mr Chopra saved tax of Rs 1,54,500. Both HUF and Mr Chopra (as well as other members of the HUF)
can claim a deduction under section 80C. Furthermore, the income of the HUF can be invested by the HUF and will continue to be
taxed in the hands of the HUF. Need help with estimating your taxes as an HUF? Our CAs can help you
3. How to form an HUF?

While there are tax advantages of forming an HUF, you must also meet some conditions –
 One person cannot form HUF, it can only be formed by a family.
 A HUF is automatically created at the time of marriage.
 HUF consists of a common ancestor and all of his lineal descendants, including their wives and unmarried daughters.
 Hindus, Buddhists, Jains and Sikhs can form HUFs.
 HUF usually has assets which come as a gift, a will, or ancestral property, or property acquired from the sale of joint
family property or property contributed to the common pool by members of HUF.
 Once a HUF is formed it must be formally registered in its name. A HUF should have a legal deed. The deed shall contain
details of HUF members and the business of the HUF. A PAN number and a bank account should be opened in the name
of the HUF.
4. Disadvantage of forming an HUF

Though HUF seems like the perfect way to save tax as a family, it comes with its own drawbacks. Equal rights of members: The
greatest disadvantage of opening a HUF is that its members have equal rights on the property. The common property cannot be
sold without the concurrence of all the members. Any additions to the family, by way of birth or marriage, become a member of the
HUF and get equal rights. A HUF can get too large to manage. Partition: Perhaps the worst nightmare of opening a HUF is closing
it down. The only way a HUF can be dissolved is by a partition. All members have to agree to dissolve the HUF. Under a partition,
assets are distributed to members which can lead to a lot of disputes and can be a lot of legal hassle. Joint family system losing
relevance: HUF was recognised as a separate taxable entity by the income tax department. However, in today’s times, where
nuclear families are the norm, HUF is losing relevance. Several cases have come to fore where couples or families are fighting it out
on common household expenses, forget to pool in of assets. Divorce rates are rising and therefore, HUF as a tax vehicle is losing
importance. HUF continues to be assessed as such till partition: Once a HUF is formed, you must continue to file its tax returns,
unless a partition takes place. Any claim for partition is made to the assessing officer. The assessing officer, on receiving such a
claim, must make an enquiry after giving due notice to the members. Income from the property which was partitioned is taxed as
individual income of the member. If the member forms another HUF with his wife and children, the income of the property which was
transferred from the original HUF is taxed in the hands of new HUF.
5. Frequently Asked Questions

 Who is the Karta of an HUF?
The head of a HUF is called the Karta, he is the senior-most male member of the family.
 Can a Woman be HUF Karta?
Yes! Until January 2016, a woman could not be the HUF Karta. But in a landmark case, the Delhi High Court ruled in favour
of a female being the Karta of a HUF. However, the same has not been incorporated in the Income Tax Act as yet.
 Who are HUF Coparceners?
All the members of the Karta’s family can be members of the HUF. The male members are called coparceners, while the
females are referred to as just members. The difference between the two is that any of the coparceners can demand
partition of the HUF. The female members do not have this right in most parts of the country, except for some states like
Maharashtra and Tamil Nadu that have allowed unmarried daughters to function as coparceners. The Hindu Succession
(Amendment) Act, 2005 which came into force from September 9th September 2005 removed this gender discrimination by
giving equal rights to daughters as sons. The daughters become the coparceners of their father’s families on birth in the
same manner as sons and have the same rights as sons in the family properties.
 Can a daughter claim a share in her father’s property where her father had passed away before the amendment
made in 2005, giving equal rights to daughters and sons?
No. Both the daughter and the father has to be alive on the date of the amendment for the daughter to get the benefit,
irrespective of whether she has been married or not on that date. If the father has passed away before the amendment date,
then she wouldn’t have been a daughter on the date of the amendment. Hence she cannot claim a share in father’s
property. a. Are there any incomes which are not taxed as income of HUF? b. The following incomes are not taxed as
income of HUF c. If a member transfers his self-acquired property to the HUF without receiving proper sale consideration,
income from such property is not taxable in the hands of the HUF. It will continue to be taxed in the hands of the member. d.
Personal income of the members cannot be treated as income of HUF. “Stridhan” is an absolute property of a woman,
hence income from it is not taxable as income of HUF. e. Income from an individual property of the daughter is not taxable
in the hands of HUF even if such property is vested into HUF by the daughter.

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Hindu Undivided Family (HUF) Tax Benefits

2. Tax implications of forming a HUF

How is HUF taxed?

 HUF can take an insurance policy on the life of its members.

 A HUF is taxed at the same rates as an individual.

Income from Income of Mr. Income of Mr. Income of

Salary 20,00,000 20,00,000

House property 7,50,000 – 7,50,000

Standard 2,25,000 – 2,25,000

Income from 5,25,000 – 5,25,000

Total taxable 25,25,000 20,00,000 5,25,000

Section 80C 1,50,000 1,50,000 1,50,000

Net taxable 23,75,000 18,50,000 3,75,000

Tax payable 5,53,625 3,91,400 7,725

Total tax paid by Mr. Chopra & HUF 3,99,125

Tax saving due to forming an HUF 1,54,500

3. How to form an HUF?

 One person cannot form HUF, it can only be formed by a family.

 A HUF is automatically created at the time of marriage.

 Hindus, Buddhists, Jains and Sikhs can form HUFs.

4. Disadvantage of forming an HUF

5. Frequently Asked Questions

 Who is the Karta of an HUF?

 Can a Woman be HUF Karta?

 Who are HUF Coparceners?

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