HUF – Tax Planning Tool

What is Hindu Undivided family?

Hindu undivided family (HUF) is a Joint Hindu family with common ancestors. The Hindu Succession Act, defines a HUF, as a family of persons lineally descended from a common ancestor and related to each other by birth or marriage.

 In other words, three conditions need to be satisfied:

  1. Must be a Hindu. The word Hindu for the purpose of having a HUF is construed liberally and includes Jains, Sikh, and Buddhists.
  2. There should be a family i.e. a group of persons.
  3. Have common ancestors among them.

Who can be the Karta, Coparcener or a Member of an HUF?

Karta is the person who manages or represents the HUF and is generally the senior-most male member of the family.  Only a Co-parcener can become the Karta of HUF.

Any person (male or female) born in a Joint Hindu family who is within four degrees in lineal descendent from the common male ancestor is considered as a coparcener and anyone who becomes part of the family by virtue of marriage is treated as a member. However, a person who is adopted into the family also becomes its coparcener from adoption though not born in the family. As per the amended law since 2005, even a girl child becomes a coparcener by birth and can continue to be a co-parcener of her father’s HUF even after her marriage. However, she will only be a member of her husband’s HUF.

Co-parceners have a right to seek partition and become the Karta of the HUF. Whereas, Members have the right to be maintained out of the funds of HUF, and receive their share at the time of partition but do not have the right to seek for partition or become the Karta.

How taxed under Income tax Act.

The Income-tax Act recognizes such family as a separate entity. The definition of ‘person’ under section 2(31) of the Income Tax Act 1961 includes HUF as a separate person having its own status, distinct from any individual, firm, company, etc. A HUF is created by the operation of law and therefore cannot be created by the actions of a person.

How to create a HUF

HUF comes into existence automatically at the time of marriage. It is created through executing a deed, obtaining PAN, and applying for a bank account. The various source of its assets could be:

  • By way of gift
  • By Will
  • Common Ancestral property
  • Property acquired from the sale of joint family property
  • Property contributed to the common pool by members of HUF.

Note: To ensure personal assets or funds are not transferred to HUF account as income generated from such assets/funds will attract clubbing provisions.

How creating of HUF helps save tax legally

HUF is considered a separate legal entity as per law and hence has its own PAN and files tax returns independent of its members. By forming a HUF, one can optimize their tax liabilities and also include their family members to benefit in the future. The various advantages are:

  • Deductions and exemptions

A HUF is taxed at slab rates – the same rate as that of an individual and is eligible for a basic tax exemption limit of Rs 2,50,000.

HUF is also separately eligible for various deductions under section 80 such as:

  • Deductions for specified investments under section 80C in LIC, PPF, NSC, etc., up to Rs 1,50,000 every year.
  • Mediclaim for its family members under section 80D up to Rs 30,000.
  • Interest on savings accounts u/s 80TTA up to Rs 10,000.

Thus, total deduction of Rs 1,90,000 could be availed by the HUF irrespective of its individual member deductions.

Further specific deductions on medical treatment/expenditure of disabled or dependent family members, donations to charity, etc can be availed based on the amount spent for the said purposes.  

  • House property benefits
  • Rental income could be received on behalf of HUF, instead of the individual account.
  • The HUF is also entitled to claim a deduction for interest on self-occupied house property of Rs. 2,00,000 in a year.
  • If residential house property is purchased by the HUF, the home loan interest paid and repayment of the loan can be claimed as a deduction.
  • The HUF can also let out its property to any person and interest on loan paid deduction can be availed without any limit, in respect of the said property.
  • Business income

The HUF can carry on certain family business like any other entity:

  • Profits generated out of the family business, in the name of a HUF, shall be taxed accordingly and exemptions will give more leverage on tax saving.
  • It can pay remuneration to Karta and other family members.
  • Can give loans to its members
  • Investments and capital gain exemptions

The HUF is permitted to invest in various tax-free instruments. Also, it can avail specific capital gain exemptions under sections 54, 54B, 54F, 54EC, etc., and optimize its tax liabilities for the benefit of the entire family.

  • Family Settlement or Arrangement:

The sole purpose of the family settlement should be to settle existing or future disputes regarding property, amongst the members of the family. Since this arrangement does not involve the transfer, it would not attract gift tax, capital gains tax, or clubbing. In a family arrangement, tax incidence is considerably reduced or it may even become nil.