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

Updated on: 23 May, 2024 05:24 PM

HUF is a separate legal entity from its members and is created primarily to save taxes on income. As per Hindu law, a HUF consists of all people from a common ancestor. Their wives and unmarried daughters are also a part of HUF. This guide talks about the wide range of HUF tax benefits that you can avail of.

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 possess 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 one 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:

Particulars Dhairya
Salary Income / Business Income 18,00,000 10,00,000
Rental Income from ancestral property 5,00,000
Total deductions under section 80 1,50,000 1,50,000
Total Taxable Income 21,50,000 8,50,000
Tax Liability as per Slab Rate 4,84,100 97,850
Combined Tax Liability 5,81,950

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:

Particulars Dhairya Khushi HUF
Salary Income / Business Income 12,00,000 10,00,000 6,00,000
Rental Income from ancestral property 5,00,000
Total deductions under Section 80 1,50,000 1,50,000 1,50,000
Salary Income / Business Income 12,00,000 10,00,000 6,00,000
Total Taxable Income 10,50,000 8,50,000 9,50,000
Tax Liability as per Slab Rate 132600 85800 106600
Combined Tax Liability 325000

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.

Can HUF hold assets in its name?

An Hindu Undivided Family (HUF) can hold assets in its own name. In fact, it's a distinct legal entity separate from its individual members. This means the property owned by the HUF doesn't belong to any single member but is collectively owned by all the members.

Here are some common types of assets an HUF can hold:

  • Ancestral property
  • Gifts received by the HUF
  • Proceeds from the sale of joint family property
  • Property acquired through a will
  • Contributions made by HUF members to a common pool

It's important to remember that since all members have a right to the HUF's assets, selling them requires consent from everyone involved.

Partition of HUF

A Hindu Undivided Family (HUF) can undergo a partition, which essentially divides the family's property and severs the joint family status. There are two main types of partitions in an HUF:

  • Total Partition: This is a complete division of the HUF. All the coparceners (individuals with a share in the HUF property) receive their designated portions, and the HUF ceases to exist as a legal entity.
  • Partial Partition: This is a more nuanced division. It can be:
    • Partial by Members: In this scenario, some members choose to separate from the HUF and take their share, while others remain together. The HUF continues to exist for the remaining members.
    • Partial by Property: Here, only some of the HUF's assets are divided among the coparceners. The remaining property continues to be held jointly by the HUF.

Important Points to Consider:

  • Income tax laws in India recognize only total partitions. This means that for tax purposes, a partial partition won't be acknowledged. The income generated from assets distributed through a partial partition might still be taxed under the HUF.
  • There's no legal compulsion for equal division of assets during partition. The coparceners can agree on a different distribution scheme as long as everyone consents.
  • A partition can be formalized through a written deed or can even be implied through separate possession and enjoyment of property by coparceners.

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 more about the tax implications of HUF and CA assisted e filing income tax return, Book eCA Now!

Frequently Asked Questions

Q- Can a HUF get Senior Citizen Benefits?

While the members of HUF above the age of 60 years can avail of senior citizen benefits individually, the HUF cannot avail of any benefit that is available to the senior citizens. For example, the Karta (senior citizen) can get a health insurance premium deduction of 50,000, but the HUF can only avail of a deduction of Rs.25,000.

Q- Is income from HUF taxable?

Yes, the income earned under HUF is taxable as per the applicable slab rates for individuals. A HUF can avail of the same deductions as any other individual. It includes a basic exemption of Rs.2.5 lakh and other deductions under sections 80C, 80D, 80TTA, 80G, etc.

Q- Is money received from HUF taxable?

For both individuals and HUFs, a transfer of an amount not exceeding Rs.50,000 is exempt from tax. Therefore, money received from HUF is exempt from tax upto Rs.50,000. However, any amount exceeding that is taxable per the applicable slab rates.

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.