HUF: All you wanted to know about the concept of the Hindu Undivided Family

[ecis2016.org] This guide will help you understand the concept of HUF, how it helps you save taxes and the rules and regulations governing HUFs in India.

The formation of a Hindu Undivided Family or HUF is quite common in India, for income tax-saving purposes. This guide will help you understand the concept of HUF, how it helps you save taxes and the rules and regulations governing HUFs in India.

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What is a HUF?

HUF stands for ‘Hindu Undivided Family’. A HUF, under Hindu law, is a family consisting of lineal descendants from a common ancestor. It includes their wives and unmarried daughters. A Hindu Undivided Family cannot be created under a contract. It is created automatically in a Hindu family. Apart from Hindus, Jain, Sikh and Buddhist families can also create a HUF.

What does a HUF consist of?

A HUF can include three generations of a family and all its members. A HUF consists of the karta, typically the male head of the family, along with the coparceners. Daughters continue to be coparceners in their father’s HUF even after marriage. They become a member of their husband’s HUF too.

Read our guides on Karta & coparcener.

Role of women in a HUF

Daughters become the coparceners in a HUF since birth, just like sons. Consequently, they have the same rights and duties as the sons in a HUF. This means that they can demand their share of HUF properties. This change in daughter’s rights was brought about by an amendment in the Hindu Succession Act in 2005. Before that, daughters were members of a HUF but not coparceners.

It is important to note that women who join a HUF through matrimony are members and not coparceners.

[ecis2016.org] Property rights of a Hindu daughter under the Hindu Succession Act 2005

How to form a HUF?

A HUF gets formed automatically after the marriage of an individual, which is considered the start of a family. However, it would be legally accepted only when a deed of HUF is drafted and executed following due procedure. This can be done at any point in time.

The process to form a HUF

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Step 1: Write a HUF deed

Written on a stamp paper, a HUF deed states the names of the HUF’s karta, coparceners and members.

Step 2: Apply for a HUF PAN card

Use Form 49A to apply for a PAN card at the NSDL website.

Step 3: Open a HUF bank account

All monies received and spent by the HUF must be sourced through this account.

Residential status of a HUF

Under the income tax law, a HUF can have any one of the following residential statuses:

(1) Resident and ordinarily resident in India

(2) Resident but not ordinarily resident in India

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(3) Non-resident

HUF property

A legal entity, a HUF can own property in its name. However, a property belonging to a HUF belongs to all the members.

Taxation of a HUF

The income earned by members of a HUF belongs to the entire family and not to an individual. This is why the income is taxed in the name of the HUF and not for individual members.

A HUF is treated as a ‘person’ under Section 2(31) of the Income Tax Act, 1961. It has a PAN card and files its taxes separately and independently from its members. A HUF is taxed at the same rate as an individual under the Indian income tax law.

However, for a HUF to be taxed in that capacity, it must fulfil two conditions:

1. It should have coparceners.
2. It should have a joint family property, which consists of ancestral property, property acquired with the help of ancestral property and property transferred by its members.

Since a HUF is taxed independently from its members, it is eligible for claiming income tax deductions of its own, including those offered under Section 80 C. A HUF can also claim deductions under Section 54, Section 54B, Section 54D, Section 54EC, Section 54F, Section 54G and Section 47.

However, the members and the HUF cannot claim a deduction for the same investment or expense.

[ecis2016.org] Implications if a HUF is abolished as a tax unit

HUF advantages

1. A HUF can run its own business to generate income.
2. A HUF can invest in the market.
3. HUFs enjoy a basic tax exemption of Rs 2.5 lakhs.
4. A HUF can own a residential house without having to pay taxes.
5. A HUF can avail of a home loan.
6. One can claim an additional tax deduction of Rs 25,000 on premiums paid towards health insurance of members of the HUF. This limit increases to Rs 50,000 if the member is a senior citizen.

HUF disadvantages

1. Once a joint family’s income is assessed as a HUF, it will continue to be so until the coparceners opt for a partition.
2. Shutting down a HUF can be complex, since it requires the consent of all the members of the Hindu Undivided Family.
3. The karta has more powers than coparceners or members.
4. New members that join the family by way of birth or marriage, have an equal share in the HUF property. This is even true of an unborn child.
5. In case a HUF is dissolved and its assets sold, each member will have to pay taxes on the profit they receive. The income tax law views this gain as their income.

HUF FAQs

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