Hindu Undivided Family (HUF): Legal Aspects & Clarifications

A Hindu Undivided Family (HUF) is a distinct legal entity formed by lineal descendants of a common ancestor, including sons and daughters. Governed by Hindu law, it allows the family to jointly own assets, run businesses, and manage inherited property. Wives are members of the HUF but do not have inheritance rights by birth.

A Hindu Undivided Family (HUF) is recognised as a separate legal entity under Indian tax law. This allows families to collectively manage income and property while enjoying certain tax-related provisions. Below are some of the key benefits that an HUF can offer:

Separate Tax Entity: There are separate tax regulations for HUFs, which provide an additional exemption limit beyond that of individual members.

Deductions: HUF can claim deductions under various sections of the Income Tax Act, like Section 80C, 80D, 80G etc. This includes PPF, life insurance, and ELSS. They can also claim capital gains exemptions under Sections 54 and 54F.

Pooling of Family Income: Families can pool income under HUF, leading to potential savings by spreading income across multiple entities.

Inheritance and Succession: HUF can own and manage ancestral property, simplifying succession and tax liabilities.

Business Operations: HUF can conduct business independently and file tax returns accordingly.

Opening an HUF account involves a few formalities to ensure legal recognition and compliance with tax regulations. Below are the key steps involved:

Step 1: Apply for a PAN Card for HUF
To open a bank account, the HUF must have a separate PAN card. Apply by submitting:

• PAN application form (Form 49A)
  

• Proof of identity and address of the Karta
  

• HUF declaration mentioning the Karta and family members
  

• Copy of the HUF deed (optional but recommended)
  

Step 2: Draft an HUF Deed
Although not legally mandatory, an HUF deed strengthens the validity of the entity. It should include:

• Name and date of formation of the HUF
  

• Details of the Karta and coparceners
  

• Declaration of intent to form an HUF under Hindu law
  

Step 3: Open a Bank Account in the Name of HUF
With the PAN card and deed, the HUF can open a bank account. The Karta will be the authorised signatory, and this account will be used for managing HUF-related financial transactions.

Step 4: Manage Investments and Income Under HUF
Once established, the HUF can invest in assets, own property, or conduct business. All income and expenses must be accounted for under the HUF, and annual returns should be filed separately.

A Hindu Undivided Family (HUF) is formed automatically in a Hindu household when members of the family live together and share common assets. It is not created by contract but comes into existence by operation of Hindu law. Below are the key aspects of its formation and eligibility:

Formation Basics

• An HUF is formed automatically in a Hindu family.
  

• It comes into existence when a family inherits property from ancestors.
  

• Registration is not mandatory, but obtaining a PAN and deed is recommended for legal recognition.
  

Membership Structure

• Members of an HUF are lineal descendants of a common ancestor.
  

• Wives of male members and unmarried daughters are also included.
  

• The Karta (manager) is generally the senior coparcener, male or female.
  

Rights & Liabilities

• All members (coparceners) have equal rights over ancestral property.
  

• Liabilities are shared collectively by the family.
  

• Coparceners can demand partition of the HUF property.
  

Residential Status

• The residential status of an HUF is determined under the Income Tax Act.
  

• An HUF can be classified as “resident” or “non-resident” depending on where the control and management of its affairs are situated.

Here are the key points to understand how a Hindu Undivided Family (HUF) is treated under income tax law:

• Separate Tax Entity: An HUF is assessed independently of its individual members for income tax purposes.
  

• Tax Slabs: HUFs are taxed according to the same income tax slabs as individual taxpayers.
  

• Deductions: Eligible deductions can be claimed under sections like 80C, 80D, and 80G, subject to conditions.
  

• Filing Returns: The Karta, as head of the HUF, is responsible for filing the income tax return on behalf of the family.
  

• Income Sources: HUFs can earn income from property, business, capital gains, and investments, which is taxed under its PAN.

From Assessment Year (AY) 2024–25, the new tax regime is the default for individuals, HUFs, AOPs, BOIs, and AJP. Eligible taxpayers can opt for the old regime. Non-business taxpayers can switch every year through the ITR. Business or professional taxpayers must submit Form 10-IEA and can switch only once.

The following tax rates applied to HUFs (resident or non-resident) in the previous year:

Before deciding whether to form a Hindu Undivided Family (HUF), it is important to understand both the advantages and the limitations of this structure. Below is a balanced view of its key aspects:

Advantages of HUF

• Tax Assessment as a Separate Entity: HUF enjoys a distinct legal identity for tax purposes.
  

• Asset Ownership: It can own ancestral properties and manage them collectively.
  

• Pooling of Income: Income from various sources can be consolidated under the HUF.
  

• Ease of Succession: Family property is managed within the HUF, simplifying succession in some cases.
  

• Independent Business Operations: HUF can carry out business activities and file returns independently.
  

Disadvantages of HUF

• Partition Issues: Division of property can be complex and may lead to disputes.
  

• Limited Membership: Only family members from a common ancestor can be part of an HUF.
  

• Karta’s Control: The senior-most male (or female, post-2005 amendment) has primary authority, which may sometimes cause conflict.
  

• Dissolution Challenges: Once created, dissolving an HUF is not easy and requires formal partition.
  

• Restrictions on Sale of Property: Property held by an HUF cannot be easily sold without consent from all coparceners.

An HUF serves as a recognised entity that families may use for managing property, income, and collective financial decisions. You can utilise HUF for:

• Holding ancestral property and investments

• Operating family businesses under a single entity

• Tax-efficient wealth transfers across generations

• Managing family income and expenses collectively

The Hindu Undivided Family (HUF) continues to hold significance as both a legal and financial framework in India. Legally, it is a recognised entity under Hindu law with defined rules for formation, membership, and succession, ensuring that family assets are governed within a structured framework. From a tax perspective, an HUF is treated as a separate taxpayer under the Income Tax Act, allowing it to manage income, claim permissible deductions, and file returns independently—provisions that must be seen as part of compliance rather than a strategy for maximising benefits.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.