Understanding HUF and Its Benefits for Income Tax Savings

In India, a Hindu Undivided Family (HUF) is a distinct taxable entity that allows families, particularly those with shared assets or businesses, to be assessed separately from individual members. By forming a HUF, you may consolidate family assets under one structure and benefit from a separate tax identity.

This arrangement provides an additional Permanent Account Number (PAN) and enables you to claim further deductions, which may lawfully reduce your overall tax liability. It is important to understand whether you are eligible to establish an HUF and the advantages of an HUF that you can enjoy.

A Hindu Undivided Family (HUF) is a type of family made up of a common ancestor and all their direct descendants. It includes sons, daughters (unmarried), grandchildren, and the wives of male members. Individuals belonging to the Hindu, Jain, Buddhist, or Sikh communities are eligible to form an HUF and pool their assets under this family unit.

The concept of the HUF was first recognised as a separate taxable entity in Indian law in 1917. Since then, numerous families have utilised the tax benefits available to HUFs to manage and grow their collective wealth.

There are several HUF tax benefits that include the following:

• 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 a HUF account is necessary for financial and tax transactions. The process includes:

1.Obtaining PAN: Apply for a Permanent Account Number for the HUF by submitting the necessary documents such as:

• PAN application form

• Proof of identity

• Address

• Declaration about the Karta
  

2.Creating an HUF Deed: Though not mandatory, drafting an HUF deed that declares the formation of the family, members, and details of the Karta helps in official matters

3.Opening Bank Account: Visit the bank with the HUF deed, PAN card, and identity proofs of the Karta and other family members to open an HUF savings or current account

4.Investment Account: HUF can also open Demat or trading accounts for investment purposes through a distributor

Here is some essential information about the formation and eligibility of an HUF:

• Karta: The head of an HUF is the Karta

• Minimum Members: An HUF requires at least two members

  • Family Members: Includes grandfather, father, sons, daughters (unmarried), grandsons, mother, and wife

• Coparceners Definition: Coparceners are members who gain status by birth

  • Coparcener Eligibility: Includes male and female descendants; excludes women who marry into the family

All the members abide by these rules:

• Partition Rights: Only coparceners can legally demand the partition of HUF property

• Daughters’ Status: Daughters are coparceners and can claim a share in family assets

• Liability of Coparceners: Coparceners are liable for their proportionate share in the HUF

• Karta’s Liability: The Karta holds unlimited liability for HUF dues, including taxes

• Wife: The wife of a male member can become a member of HUF, but she will not acquire the status of coparcener

There are some important points to be aware of from a residential point of view: 

• If a HUF manages its affairs fully or partly from India, it qualifies as a resident

• If the Karta lives in India and meets the conditions to be an ordinarily resident, the HUF also holds the status of a resident and ordinarily resident

• If the Karta resides in India but does not qualify as an ordinarily resident, the HUF becomes a resident but not ordinarily resident

• If the HUF controls all its activities from outside India, it qualifies as a non-resident

HUF is a separate taxpayer with its own PAN. It earns income from various sources such as business, property, or investments and pays taxes separately from the individual incomes of its members.

The Income Tax Department assesses HUF income under the Income Tax Act similarly to individuals, with some provisions specific to the family structure. HUF taxation laws allow families to take advantage of a separate tax slab and deductions, which can effectively reduce their overall tax liability. 

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:

The HUF structure is a perfect way to save on taxes, but it also comes with some drawbacks:

Advantages

• Separate taxation helps reduce the overall family tax burden

• Legal recognition helps in the joint ownership and management of family assets

• Simplifies property succession and inheritance issues
  

Disadvantages

• Additional family by birth or marriage can make it too large to manage

• The Karta holds significant decision-making power, sometimes limiting democratic family participation

• Income pooling may sometimes complicate individual taxation and income tracking

• Disputes among coparceners can affect management and operation

• You can not sell a common property without coparceners

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 serves as a unique and legally recognised entity that offers practical advantages in income tax planning. By functioning as a separate taxable entity, HUF allows families to optimise their tax liabilities within the framework of Indian law. 

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.