The Hindu Undivided Family (HUF)
structure is a very effective way to save tax and a lot of people are
eligible to create HUFs but can't do because of lack of awareness.
Many a times we feel that creation of HUF requires lot of procedural formalities and lengthy process hence try to avoid it.
I do not know whether marriages brings fortune to your life or not, but from tax aspect HUF is the biggest gift for getting married.
An HUF is automatically constituted the moment a person gets married.Which means a Hindu male needs to do nothing to get an HUF created but
to get married to a Hindu female. It is one marriage gift that all
Hindus get from the government or Hindu Law. It is not necessary to have
children to create HUF.
Sikhs, Jains and Buddhists can also create an HUF under the Income Tax Act even though they are not governed by the Hindu law.
WHAT IS HUF ??
An HUF is a separate and a distinct tax entity. The income of an HUF
can be assessed in the hands of the HUF alone and not in the hands of
any of its members. The senior most member of the family who manages the
affairs of the family is called the Karta. Minimum requirement is of two people (at least
one male member)to create HUF.
A coparcener is a member of the HUF, who by birth acquires an
interest in the joint property of the family, whether inherited or
otherwise acquired by the family.
Coparceners (Member of HUF) have right to claim partition of the HUF. Coparceners consist of a Karta
and his lineal descendants within the following four degrees:
- 1st Degree: Holder of the ancestral property for the first time – Karta
- 2nd Degree: Son(s) and Daughter(s) of the Karta
- 3rd Degree: Grandson(s) of the Karta
- 4th Degree: Great Grandson(s) of the Karta
A daughter, after her marriage, would remain a coparcener in her
father’s HUF and at the same time, can become a member in her husband’s
HUF. In the event of the death of the Karta and in the absence of any
male member, two females can continue to run the HUF and the senior
female can take over as the Karta. A son can create his own HUF while
remaining a coparcener in his father’s HUF.
CAPITAL INFUSION :
Here comes the most difficult part for someone to start the HUF operating – generating capital for the HUF.
One should not contribute his own personal assets or funds into the
HUF as any income generated from these assets or from its investment
will be clubbed into Individual’s personal income under Section 64 (2)
of the Income Tax Act and hence taxed accordingly.
But there is a way out – one can transfer his personal assets or
funds into the HUF if the income generated from these assets or from its
investment results in a tax free income (like tax free bonds) and hence
there is no scope of any tax liability due to clubbing of taxable
This tax free income can then be reinvested to earn even taxable
income and eventually all of the income would fall out of the clubbing
Gifts or inheritances meant for the benefit of all the members of a
family should be diverted specifically to the HUF. HUFs are liable to
pay tax if the value of the gifts taken from the strangers exceeds Rs.
50,000. Though there is a limit for an HUF to take gifts from the
strangers, gifts of a higher value can be taken from the relatives, who
are not the members of the HUF.
Here is the list of people who fall in the category of relatives:
- Karta’s Wife
- Brother(s) or Sister(s) of the Karta
- Brother-in-law or Sister-in-law of the Karta
- Immediate Uncle(s) or Aunt(s) of the Karta
- Immediate Uncle-in-law or Aunt-in-law of the Karta
- Lineal ascendant or descendent of the Karta or Karta’s wife
A father can also gift money to his son’s HUF but need to specify in
the gift deed that the gift has been made to the son’s HUF and not to
the son as an individual. Ancestral property can be an asset of the HUF
and an income earned on this property can be classified as the income of
the HUF. If any of these ancestral properties are sold, the money
received on such a sale should be transferred to the HUF.
How to get started with the HUF?
Once there are two eligible family members ready to operate an HUF,
the first thing to do is to apply for a PAN card in the name of the HUF
and have a separate bank account opened.
For a PAN application, an affidavit by the Karta stating the name,
father’s name and address of all the coparceners on the date of the
application is considered sufficient as the document proof of identity
of the HUF. Also, the identity and address proof of the karta will be
treated as the address proof of the HUF.
Then start seeking for gifts or inheritances from relatives or
strangers, keep on infusing your own capital, transfer family’s
assets/properties to the HUF and do all the possible things that you can
keeping in mind the clubbing of income provisions.
(Please ask for format of affidavit if you require by mailing us)
Sections/Provisions under which HUFs can claim Deduction/Exemptions and Save Tax
As already mentioned, an HUF is a separate and a distinct tax entity
and just like any other Resident Individual assessee, it also enjoys a
basic tax exemption of Rs. 2,00,000. All other tax slabs are also
exactly same as for an Individual. Here is a useful link from
Bemoneyaware that shows the TDS rates for Individuals and HUFs.
Section 80C: HUFs can claim tax exemption under
Section 80C by investing money in ELSS, ULIPs, traditional insurance
plans, NSC or 5 year Bank FD with a scheduled bank. Principal repayment
on a housing loan taken by the HUF can also be claimed under this
section. HUFs are not allowed to invest in PPF anymore.
Section 80D: Members of the HUF can take a family floater policy and make the HUF pay for its premium and enjoy the tax benefit too.
Section 80DD: If any dependant member of the HUF is
normally disabled (not less than 40% disabled) and the HUF makes an
expenditure for the medical treatment, training and rehabilitation of
that disabled member, then the HUF can claim a deduction of Rs. 50K
under this section. If the condition is of a severe disability (equal to
or more than 80%) then the HUF can claim a deduction of Rs. 100,000.
Section 80TTA: Interest earned on the money deposited in the savings bank account up to Rs. 10,000 p.a. is exempt for an HUF also.
Section 24 (b): Interest on Housing Loan: If an HUF
takes a loan for buying out a residential property, it can claim a
deduction of Rs. 150,000 in respect of Interest on Housing Loan.
30% Standard Deduction on a Rented Property: An HUF can claim a standard deduction of 30% from the rental income it earns by letting out a property.
Capital Gains on a House Property: Tax on Capital
Gains made by selling a house property can be saved if the HUF invests
the proceeds into buying another property within two years from the sale
of the said property. The money can also be invested in Capital Gain
bonds offered by REC and NHAI with a lock-in period of 3 years. The
interest income on these bonds would be considered a taxable income of
The table below shows how the income of an individual in the 30% tax
bracket can be split between two entities to lower the final tax outgo:
Some Other Important Points
- Karta can be paid a reasonable salary for his services of managing
day to day affairs of the HUF. The salary will be considered his
personal income but at the same time it is deductible as an expense from
the books of the HUF.
- Only one member or coparcener cannot form an HUF. There have to be at least two members and at least one male member.
- HUF can keep its normal functioning even with two females after the death of its sole male member.
- The Hindu Succession (Amendment) Act 2005 has given equal rights to
male and female in the matters of inheritance as a result of which a
daughter now also acquires the status of a coparcener.
- An HUF cannot become partner in a firm but a Karta can.
These were some important aspects when it comes to creating an HUF
and everyone, who is eligible to create an HUF and pays taxes, should
strongly consider this option as it is a very efficient and good way to
DISADVANTAGE OF HUF
"Even if one co-parcener demands the
partition of the HUF property, the other coparceners will have to agree
even though they may not want a partition,"
If the HUF has only financial assets (stocks,
investments, fixed deposits, etc), gold and cash, it can be easily
distributed among the co-parceners. But if the assets include immoveable
property or a running business, it is not very easy to split them.
Ancestral property may need to be sold to give a share to all