Hindu Undivided Family (HUF) - A Tax Saving Weapon By CS Annu Sharma

Dear Professional Colleagues,

As a responsible citizen of our country, we should pay our income taxes on time and should not avoid paying it. However, if the Income Tax Act, 1961 provides legal opportunities to save Income tax, it will not be prudent if you are not taking benefits of such provisions. HUF is an entity, which has been given certain exemptions, quite similar to an Individual by the IT Act. If we are a born Hindu or a Sikh or a Buddhist or a Jain, we can take benefit of these provisions, and if possible you should take it.
What is a HUF?

Hindu Undivided Family (‘HUF’) is treated as a ‘person’ under section 2(31) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’). The Income Tax Act 1961 provides that a HUF (Hindu Undivided Family) is a separate unit like an individual and is too assessed accordingly. A HUF is eligible for those exemptions that are available to a resident Indian who is not a senior citizen. It can own property and also have its own business.
Who are all included in the HUF?

The HUF includes those persons who, by birth, acquire an interest in some joint family property. It also includes all lineal descendants of these persons, and their wives, and children, both sons and daughters. Even married daughters can remain a part of the HUF while being a member of her spouse’s family HUF.
What are the Income Tax Benefits in forming a HUF?

To understand the income tax benefits (we are not discussing the wealth tax benefits, as they too are available) additionally available by forming a HUF, let us take an example of a family, which is now common, the nuclear family.

Aditya is married to Anu and has two minor children, Tina (daughter) and Bittu (son). Aditya’s annual income is Rs. 10,00,000 and Anu Rs. 10,00,000. Aditya has inherited an ancestral property, an apartment, which is on rent (annually Rs. 3,00,000).

If Aditya forms a HUF, with him the Karta (head of the HUF), his children will be called coparceners and his wife will be a member. The first benefit Aditya will have that the rent income of Rs. 3,00,000 which was hitherto assessed as part of his income and now be carved out and shown as HUF income and the HUF will be assessed separately as another entity and will have the benefit of the exemptions of IT Act similar to those received by Aditya.

This will lead to substantial reduction of Income-tax being hitherto paid by Aditya and the HUF will pay a much smaller amount of Income tax on this income of Rs. 3,00,000/- after enjoying the exemptions available. Also, the gifts received by the coparceners/member (beyond the exemption limit) can be shown as received by the HUF, thereby reducing the income tax burden of both Aditya and Anu.

Now, you may invest the HUF income in LIC policies, PPF accounts, ELSS instruments in the name of Karta, coparceners or member of the HUF and it will get the income tax deductions under Section 80C.

Deduction from gross total income?

An HUF is entitled to deductions available under Chapter VI-A (as applicable) while calculating its taxable income.

 The rate of Tax?

  1. An HUF is taxed on the same slab rates which are applicable to an Individual.
  2. An HUF is liable to pay Alternate Minimum Tax if the tax payable is less than 18.5 per cent (including cess and surcharge) of “Adjusted Total Income” subject to prescribed conditions.
How to form a HUF?

The following steps are required to form a HUF:

  1. Prepare an affidavit on a Stamp paper with a rubber stamp; ID Proof, residence proof and the proof of the members of the family of HUF Then apply for PAN (Permanent Account Number) from the income tax authorities.
  2. The rubber stamp should be rectangular carrying the name of the HUF and that of the Karta
  3. Open a bank account in the name of Hindu Undivided family titled “Aditya HUF”(Example).
  4. Transfer the rent income received from the ancestral property along with the excess gift amount received by the HUF members (Karta, coparceners and members)
Disadvantages of HUF

Though a significant amount of tax can be saved by forming a HUF, there are few disadvantages of HUF which should be taken into consideration. Whenever an asset is transferred to HUF it remains with it. Only when the coparceners will demand a partition of HUF, the property can be shared by the coparceners.

HUF property cannot be mentioned in the WILL. In case of Aditya HUF, the ancestral property transferred to HUF will remain part of HUF and Aditya later cannot transfer to his wife or son or daughter. Of course, after his death, his son will become the Karta, but other members will enjoy the benefits and income of the HUF.

Who should actually form a HUF?

HUF will be a good option for persons who have sufficient income and savings and who also have some ancestral property too (which could be treated as family assets for HUF). Before forming a HUF one should calculate the tax benefits clearly and then take a calculated decision.

The following incomes are not taxed as income of HUF:

  1. If a member has converted or transferred without adequate consideration on his self-acquired property into the joint family property, income from such property is not taxable in hands of the family.
  2. Income of impartible estate (though it belongs to family) is taxable in the hands of the holder of the estate and not in hands of HUF.
  3. Personal income of the members cannot be treated as income of HUF.
  4. “Stridhan” is the absolute property of a woman; hence income arising therefrom is not taxable as income of HUF.
  5. Income from an individual property of daughter is not taxable in hands of HUF even if such property is vested into HUF by a daughter.
Concluding Factors of Article:

In order to compute the income of an HUF, one has to first ascertain its income under the different heads of income (ignoring incomes exempted under sections 10 to 13A of the Act). The following points should be kept in mind while computing income:

  • If funds of an HUF are invested in a company or a firm, fees or remuneration received by the member as a director or a partner in the company or firm may be treated as income of the family (if fees or remuneration is earned essentially as a result of the investment of funds).
  • However, if fees or remuneration is earned for services rendered by the member in his personal capacity, it will be treated as the personal income of the member.
  • If any remuneration is paid by the HUF to the Karta or any other member for services rendered by him, remuneration is deductible from income of HUF if such payment is genuine and not excessive and paid under a valid and bonafide agreement.
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