What is Hindu Undivided Family (HUF) - Features & Tax Benefits

What is Hindu Undivided Family or HUF?

HUF, which stands for Hindu Undivided Family, is a joint family setting wherein the family members are considered a separate legal entity from the HUF for taxation. A HUF is generally formed if the family has any ancestral property, a property purchased from the sale of joint family property, a gift received, etc. It includes only those who descend from a common ancestor, their wives, and their children.

The head of HUF is called ‘Karta,’ who manages the entire HUF business. The male members of the HUF are called co-parceners, and the female members are called members. A HUF can be created by a married male member. His wife, children, their wives, and their children can all be a part of HUF. Generally, the eldest male member of the family becomes the ‘Karta.’ Now if the Karta has 2 daughters, and the father passes away, the eldest daughter can become the Karta and take forward the HUF business.

What are the HUF Account Rules?

Here are the conditions that you need to fulfill to form a HUF -

• An individual cannot form it, and you need a family.
• Marriage automatically results in the creation of a HUF
• HUF includes the descendants of a common ancestor, their unmarried daughters, and their wives.
• HUF can be formed by Hindus, Sikhs, Jains and Buddhists
• After the formation of HUF, it should be registered formally with a legal deed, PAN number, and bank account. The deed should also mention the details of HUF members and its business.
• Every member can deposit their income in the common HUF corpus.
• The members can claim benefits under various sections.

What are the Tax Benefits of Forming a HUF?

HUF has a separate PAN number from its members and can avail the benefit of basic exemption limit of 2.5 lakh. This is not all; there are various other tax benefits of forming a HUF. Let’s discuss them in detail -

• Income Tax Benefits: Since a HUF is a separate legal entity from its members and holds a separate PAN, it can generate income, run its own business, and make investments in shares, property, etc. Along with this, it can also avail of the basic exemption limit of 2.5 lakhs.
• Own a Residential House: As per the Indian Income Tax Act, if you are in possession of more than one residential, self-occupied property, only one is considered self-occupied, and you have to pay tax on the remaining properties. A HUF can own a residential house without paying any tax. Therefore, by registering for HUF, you can own more than 1 residential property without paying taxes.
• Life Insurance: Just like individuals can avail of a deduction of Rs.1,50,000 on investments in certain schemes and life insurance premiums, HUFs can also avail of a benefit of Rs.1,50,000 under section 80C.
• Investment: An HUF can also invest in tax-saving schemes like ELSS and earn tax benefits up to Rs.1,50,000 under section 80C.
• Health Insurance: You get a deduction of Rs.25,000 annually on the health insurance premium paid for your family under section 80D. However, this deduction can seem insufficient with the rising premiums. A HUF can claim an additional deduction of Rs.25,000, making the total health insurance premium deduction to be Rs.50,000.

How is the HUF Income Tax Computed?

In addition to the individual benefits provided to the members, HUF can also avail of tax benefits and a basic exemption limit of Rs.2,50,000. Let us understand this with an example -

Dhairya and Khushi are married and have a son named Tanmay. Khushi earns Rs. 10 lakh per year. Dhairya earns Rs. 18 lakh from his business and Rs.5,00,000 as rent from his ancestral property. Their Tax Liability is as follows:

Now, if they form a HUF, they can

• Divert the rental income and a portion of Dhairya’s income (6,00,000) to the HUF account.
• They can make investments from HUF and also pay insurance premiums from HUF.

Tax Liability is as follows:

As you can see, Dhairya and Khushi saved Rs. 2,21,450 by creating a HUF and diverting some income there.

Disadvantage of forming an HUF

• Equal Rights on Assets: All family members have equal rights to the family assets, which can lead to complications when consent is needed for asset sale or distribution. Disputes may arise among family members regarding the management and division of assets, leading to conflicts and legal battles.
• Complexity in Dissolution: Closing an HUF can be complicated, with legal and logistical challenges involved in asset distribution among family members. This process can be time-consuming and expensive, especially if there are disagreements among family members regarding the division of assets.
• Decreasing Relevance: With the shift from joint families to nuclear families, the relevance and importance of HUF as a tax-saving tool are declining. In today's modern society, where nuclear families are more common, the benefits of the HUF structure may not be as significant as they once were.
• Disputes and Divorces: Cases of disputes and divorces within the family further complicate the situation, diluting the benefits of the HUF structure. In such situations, it can be challenging to manage and distribute assets fairly among family members, leading to additional legal and emotional complications.

HUF offers tax benefits by providing separate tax exemptions and deductions similar to those available to individuals. This can lead to significant tax savings for families, as income is divided among family members, potentially resulting in lower overall tax liability. To know how HUF can help you save taxes and build a better future, consult our tax experts.