Understanding what is HUF?
HUF (Hindu Undivided Family) is a family structure that enables tax savings by pooling assets together and forming a unified entity. Once formed, the HUF is taxed separately from its individual members, offering several HUF tax-saving benefits. Any Hindu family (including Buddhists, Jains, and Sikhs) can form an HUF. HUFs have their own PAN and file tax returns independently.
Within the HUF, members including the Karta are called coparceners, they are related to one another and the Karta (head of the family). Coparceners inherit a share of the family property by birth and are limited to the first four generations. Previously, only sons of the HUFs were coparceners, but since 6th September 2005, daughters have been granted equal coparcenary rights, allowing them to inherit family property and seek partition.
A HUF includes
Resident HUF:
A Hindu Undivided Family (HUF) is considered a resident in India if the control and management of its affairs are conducted either wholly or partially in India.
Non-Resident HUF:
If the control and management of the HUF’s affairs are entirely outside of India, it will be classified as a non-resident.
Resident and Ordinarily Resident / Resident but Not Ordinarily Resident:
For a resident HUF to be classified as resident and ordinarily resident (ROR), the Karta (head of the family) must meet two conditions that apply to individuals:
- The Karta must have been a resident in at least 2 out of the 10 years preceding the relevant previous year.
- The Karta must have stayed in India for at least 730 days or more during the 7 years immediately preceding the relevant previous year.
How Does HUF Benefit its Members?
Tax Savings
A Hindu Undivided Family (HUF) is taxed according to the same income tax slabs that apply to individual taxpayers.
Since a Hindu Undivided Family (HUF) is treated as a separate taxable entity, it is eligible for the basic tax exemption of ₹2.5 lakh on its total taxable income. This exemption is in addition to the individual tax benefits that you and your family members may already receive.
Moreover, income from the following sources is not taxable under the Hindu Undivided Family (HUF):
- Income from property transferred by a member to the HUF without adequate consideration.
- Income from a woman’s personal property.
- Income from an impartible estate, which is taxable for the estate holder and not the HUF.
An HUF can also claim deductions under sections 80C, 80D, and other provisions of the Income Tax Act, just like an individual taxpayer. Income derived from ancestral properties or businesses can be taxed under the HUF, which helps reduce the taxable income of individual family members.
Wealth Management
An HUF allows for the joint management of family wealth. Ancestral assets such as properties, businesses etc can be collectively managed under one unified entity.
How to Create an HUF?
Creating a HUF involves three simple steps:
Step 1: Create an HUF Deed
The first step is to draft a HUF deed, which is a formal legal document signed on stamp paper. This deed should clearly mention the names of the Karta (head of the family) and the co-parceners (other family members). Along with the deed, each family member must provide a declaration where the name of the Karta is declared and it is stated that:
- The Karta has the right to oversee all transactions of the HUF account on their behalf.
- The members listed in the deed are the only members of the HUF.
- The Karta has the authority over the HUF account.
Step 2: Apply for HUF PAN Card
As the HUF is considered a separate taxable entity, it must have its own PAN card. To apply, you need to fill out Form 49A, which can be submitted both offline and online.
Step 3: Open an HUF Bank Account
The final step is to open a separate HUF bank account. This account will be used to manage all the financial transactions and receive payments. The account can be opened in any bank of your choice.
HUF and Taxation
HUF is eligible for deductions under Section 80 and other relevant exemptions available under the Income Tax Act.
It is allowed to take insurance policies for its members.
The HUF can also pay salaries to its members if they contribute to the functioning of the HUF.
Investments made using the HUF income are allowed, and the returns generated from such investments are taxable.
Documents Required for Opening an HUF Account
The following documents1 are required for registration of a Hindu Undivided Family (HUF)
- PAN Card copy of Karta
- Aadhar Card copy of Karta
- Passport Size Photograph of Karta
- Specimen Signature of Karta & Family members with their names & relation with Karta
- HUF deed
Advantages & Limitations of HUF (Hindu Undivided Family)
A Hindu Undivided Family (HUF) helps manage the family’s wealth jointly and offers tax benefits, but just as every coin has two sides, a Hindu Undivided Family (HUF) also has some drawbacks. Understanding both is crucial before you decide to form a Hindu Undivided Family (HUF).
Advantages
Independent Entity
An HUF is treated as a separate legal entity for tax purposes. This means it has its own PAN and can file tax returns independently of its members. This status allows the HUF to run business or professional activities in its name and claim deductions for legitimate expenses such as salaries, rent, and operational costs.
Continued Succession
An HUF continues to exist even after the death of the Karta, with the next eligible member stepping in as the head. This ensures that the family wealth remains consolidated and managed across generations. Continued succession provides stability and long-term financial planning, making it easier to preserve assets within the family.
Loyalty and Cooperation
An HUF encourages family members to work together and make decisions jointly, fostering a sense of trust and shared responsibility.
Tax-free Loan to Members
The HUF can extend loans to its members without any tax burden. This is useful when a family member needs financial help for personal or investment purposes.
Limited Liability of Members
In an HUF, the liability of members or coparceners is generally limited to their share in the business. This means personal assets of coparceners are usually protected from the liabilities of the business.
Disadvantages
Unlimited Liability of Karta
While the HUF provides limited liability to its members, the Karta (head of the family) bears unlimited liability. This means that if the HUF faces financial issues, the Karta’s personal assets could be used to pay off the liabilities.
Dominance of Karta
While Karta can ask for suggestions and opinions of coparceners, the sole decision-making authority rests with him. This might often lead to disagreement and conflicts among family members, ultimately affecting business operations.
Misuse of Power
The Karta is the sole decision maker of the HUF. If this power is misused, it can lead to unfair use of funds for personal reasons or favouritism and partiality towards the coparceners. This might not only have an adverse effect on business but also put a strain on family relations.
Lack of Skills
The success of an HUF largely depends on the Karta’s ability to manage finances and decision-making skills. If the Karta is inexperienced or lacks proper managerial skills, it might result in the downfall of the business.
Difficult to Dissolve
The only way to dissolve a HUF is through a partition, where assets are divided among members. This process is quite complicated and may lead to disagreements or even legal disputes.
Key Takeaways
- An HUF is a separate legal entity under the Hindu Undivided Family Act.
- A HUF files taxes separately and enjoys benefits such as the ₹2.5 lakh basic exemption under the old tax regime along with deductions under Sections 80C, 80D, and other provisions.
- Family assets and income can be managed jointly, helping preserve wealth across generations.
- Karta, or head of the family, has the sole right of decision-making in HUF
- Members can receive tax-free loans for personal or business purposes.
- While HUF has several benefits, it also has certain drawbacks
Conclusion
In conclusion, an HUF is a powerful tool for family wealth management, tax planning, and succession planning. It provides families with the flexibility to manage their assets jointly while benefiting from the legal status of a separate entity. The tax benefits that come with creating an HUF can significantly reduce the tax liability for the family, making it an essential tool for families looking to optimise their financial planning.
If you are considering creating an HUF, it is recommended to consult with a tax professional or financial advisor to understand the specifications of the Hindu Undivided Family Act and the requirements and benefits of your situation.
FAQs
What is an HUF?
A HUF (Hindu Undivided Family) is a family structure that allows you to pool assets together and save taxes. It is treated as a separate legal entity for taxation purposes under the Income-tax Act, of 1961.
Who can form a HUF?
A Hindu family can come together to form an HUF, and it also applies to Buddhists, Jains, and Sikhs.
What is the role of the Karta in an HUF?
The Karta is the head of the HUF and has the authority to manage its affairs, including overseeing financial transactions and making decisions on behalf of family members.
Who are the coparceners in an HUF?
Coparceners are family members who inherit a share of the family property by birth, including sons, daughters, and their descendants. Since the Hindu Succession (Amendment) Act, of 2005, daughters have equal coparcenary rights as sons.
Can daughters be coparceners in an HUF?
Yes, after September 6, 2005, daughters are granted coparcenary rights and can inherit family property and demand a share, just like sons.
What are the tax benefits of an HUF?
An HUF is eligible for the basic tax exemption of ₹2.5 lakh and can claim deductions under sections 80D, 80C and other provisions, similar to individual taxpayers.
Is income from ancestral property taxed under the HUF?
Yes, income from ancestral properties or businesses can be taxed under the HUF, helping reduce the taxable income of individual family members.
How is an HUF taxed?
HUFs are taxed in the same income tax slabs as individual taxpayers, but their income is treated separately from that of individual family members.
What is the full form of HUF?
The full form of HUF is Hindu Undivided Family
What is an undivided property according to Hindu law?
An undivided property is a property which is jointly shared by all members of the HUF. Each coparcener has equal rights and a share of the property.
Source:
- https://etaxguru.in/huf-registration-in-india/https:/etaxguru.in/huf-registration-in-india/
