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What is HUF?

Forming a Hindu Undivided Family (HUF) can help optimize your tax liabilities by treating the family as a separate taxable entity. HUFs benefit from various tax deductions under Sections 80C, 80D, and more. Governed by Hindu law but available to Jains, Sikhs, and Buddhists, an HUF requires legal setup and careful management. It allows pooling income from various sources, but closing an HUF is difficult and requires unanimous agreement among members.

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What is HUF?

All About HUF and Tax Benefits

All About HUF and Tax Benefits
July 09, 2024

Table of Content

 

  • By forming a Hindu Undivided Family, you can optimise 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 Jains, 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 organised 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 Jains, 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 lakh 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.

HUF Account Rules – Features of Hindu Undivided Family (HUF)

  • There are a few features of HUF account that makes it different from regular saving bank accounts.
  • Every member of the family can deposit their income in the common corpus
  • Single person’s authority while participation from entire family
  • Tax benefits on deposits under various sections
  • Corpus can be divided only on agreement of every coparcener of the family
  • Documents required for opening HUF account:-
  1. HUF will have a unique PAN card; this PAN card along with the PAN of Karta should be produced.
  2. A declaration form will be provided where every member has to make a signature stating the name of Karta and declare
  3. They are the only members of HUF
  4. Karta to have sole authority over HUF account
  5. Every transaction on behalf of HUF account, made by each member of the family is governed by Karta.
  6. Residential proof of Karta
  7. Identification proof of Karta
  8. Apart from the points mentioned above there can be other documents or conditions depending on the bank where HUF account is opened.

HUF Tax Benefits

Since the account is equivalent to an individual’s account there are various HUF 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.

Disadvantages of HUF account:-

  • There can be a strong sense of insecurity among members that can keep the corpus of the account empty and as long as corpus is empty the account is non-functional.
  • If any of the members of HUF is willing for a partition then the process of partition in deposit in HUF account can turn to be tedious.

Likewise, 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 his taxable income. For instance, if an individual has a salary income of Rs 12 lakh and is earning additional business income of Rs 6 lakhs. Now, if he creates an HUF and does business in the name of a HUF, then this total 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.

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.

FAQs on HUF Tax Slab

Q: What is the income tax rate for HUF?

The current income tax rates for HUFs, whether resident or non-resident, are as follows:

Old tax regime

Upto Rs 2.5 lakh income tax slab: NIL

Above Rs 2.5 lakh & up to Rs 5 lakh:5%

Above Rs 5 lakh & up to Rs 10 lakh: Rs 12,500 + 20% above Rs 5 lakh

Above Rs 10 lakh: Rs 1,12,500 + 30% above ₹ 10 lakh

New tax regime

Upto Rs 3 lakh income tax slab: NIL

Above Rs 3 lakh & up to Rs 6 lakh:5%

Above Rs 6 lakh & up to Rs 9 lakh: Rs 15,000 + 10% above Rs 6 lakh

Above Rs 9 lakh & up to Rs 12 lakh: Rs 45,000 + 15% above ₹ 9 lakh

Above Rs 12 lakh & up to Rs 15 lakh Rs 90,000 + 20% above Rs 12 lakh

Above Rs 15 lakh: Rs 1,50,000 + 30% above Rs 15 lakh

Q: What is the tax exemption limit for HUF?

The tax exemption limit for HUFs is up to Rs 2.5 lakh (in the old tax regime) and up to Rs 3 lakh (in the new tax regime).

Q: How do you save tax on salary using HUF?

HUFs can pay salaries to their members/ Coparceners if they contribute to its functioning. This salary expense can be deducted from the HUF's income and thus claimed as a tax benefit.

Q: What are the charges for opening an HUF account?

Charges for opening an HUF account differ from bank to bank and across other different financial institutions. Check the charges with your respective bank, or other financial institutions before opening an HUF account.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Note - Tax benefits & exemptions are subject to conditions of the Income Tax Act, 1961 and its provisions. Tax Laws are subject to change from time to time. Customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law.

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