A Hindu Undivided Family (HUF) offers specific advantages as far as taxation is concerned. The Income Tax Act and Wealth Tax Act recognise the HUF as an independent assessable or taxable entity. Hence, HUFs enjoy all deductions and exemptions under the IT Act independent of the income and tax liabilities of its members. The Hindu Law defines the HUF as a family, which consists of males lineally descended from a common ancestor and includes their wives and daughters.
An HUF is automatically constituted after marriage. It can also be formed by partition of an existing HUF into multiple units. A suitable name needs to be given to the HUF, taking into consideration the prevalent laws and the business that it intends to undertake
An important requisite for the constitution of an HUF is its corpus or capital. This capital is separate from the assets owned by its members. The property received by way of a will in favour of the HUF can become the corpus Though it is not mandatory to have a deed for the formation of an HUF, it is advisable to execute one from a legal and taxation perspective. It should include details of the karta, members of the HUF consisting of coparceners, and other family members, the corpus as well as the business of the HU
An HUF has a separate PAN and the karta must apply for one. The PAN needs to be quoted while making investments and carrying out financial transactions of the HUF.
The Hindu Law comprises two schools of law which govern the HUF. These are Dayabhaga school, prevalent in West Bengal and Assam, and Mitakshara school, which is prevalent in the rest of India.
The karta must file the income tax and wealth tax returns on behalf of the HUF, in addition to his personal tax returns.
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
How to form a HUF? The following steps are required to form a HUF:
(i) Open a bank account in the name of Hindu Undivided family titled “Naresh HUF” with a rubber stamp, ID Proof, residence proof and the proof of the members of the family of HUF.
(ii) The rubber stamp should be rectangular carrying the name of the HUF and that of the Karta
(iii) Then apply for PAN (Permanent Account Number) from the income tax authorities.
(iv) Transfer the rent income received from the ancestral property along with the excess gift amount received by the HUF members (Karta, coparceners and members)
Key points in creation of HUF and format of deed for creation of HUF :
Under the Income Tax Act, an HUF is a separate entity for the purpose of income tax return.
The same tax slabs are applicable to HUF as to individual assessee.
You can not transfer your own assets/money into HUF.
If you have ancestral property and earning some income from this property, then it is better to transfer this asset to HUF and save tax up to exemption limit applicable to individual.
You can transfer the money received on sale of ancestral property /assets into your HUF.
The income from property of HUF can be further invested in instruments such as shares, mutual funds, etc. and will be assessed under HUF.
Existence of property or multiple members is not a pre-requisite to create HUF. A family which does not own any property may still have the character of Hindu joint family. This jointness is understood in terms of faith and food. This is because as a Hindu is born as a member of the joint family.
Any gifts received by the members of HUF (birthday, marriage, etc.) can be treated as assets of HUF.
The HUF is taxable as separate person under income tax hence one can save tax from basic exemption of Rs. 2 lakh. HUF will also gain from the tax slab structure of computing income tax.
Apart from basic exemption of Rs. 2 lakh, section 80C deduction up to Rs.1 lakh is also available.
For example, if you are in 30% tax bracket, then approx tax saving by creating an HUF will be as follows:
Basic exemption up to Rs. 2,00,000= nil
Rs. 2,00,000-5,00,000 @ 10%
Rs. 5,00,000-10,00,000 @ 20%
80C deductions Rs. 1,00,000
Therefore total tax payable for HUF on income of Rs. 10,00,000 is only Rs. 113300
If this income of Rs. 10,00,000 is taxed in individual hand @ 30% tax due is Rs. 3,09,000
Hence, you can save a total of Rs. 1,95,700 by creating an HUF and transferring ancestral property income and other income under HUF.
let us take another example of a family, which is now common, the nuclear family.
Deepak is married to Jyoti and have two minor children, Gauri(daughter) and Raj (son).
Deepak’s annual income is Rs10 00,000 and Priya Rs10, 00, 000.
Deepak has inherited an ancestral property, an apartment, which is on rent (annually Rs3, 00,000).
If Deepak 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 Deepak, will have that the rent income of Rs3,00,000 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 Naresh.
This will lead to substantial reduction of Income tax being hitherto paid by Naresh and the HUF will pay a much smaller amount of Income tax on this income of Rs3,00,000/- 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 Deepak and Jyoti. Now, you may invest the HUF income in LIC policies, ELSS instruments in the name of Karta, coparceners or member of the HUF and it will get the income tax deductions under Section 80C.
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 Deepak HUF, the ancestral property transferred to HUF will remain part of HUF and Naresh 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. It is advisable to hire a financial advisor, well versed in forming HUF and who will be able to give the pros and cons so that an informed decision can be taken about formation of HUF.
FORMAT OF HUF CREATION DEED
I, ________________ son Of __________________ Residing at ______________________
aged ___Adult do hereby declare-
1. That I am Karta of ___________________________________________ .
2.That I received on behalf of the H U F gift of Rs. ___________ by way of
CASH/CHEAUE from my FATHER ___________________________(name of relative of
karta of HUF) on dt. _______________ this formed the corpus of the HUF.
3. That the HUF at present is consisting of the followings members- I) Shri
_____________________, Adult, Residing at _________________ II) Smt.
_____________________, Adult, Residing at _________________ III) Kumari
_________________-Minor, Residing at ___________________
4. That the above statements are true to the best of my knowledge & belief. Declare this on
1. ————————————– (_____________________)
2. ————————————– (_____________________)
[To be executed on Rs. 100 Stamp Paper]
DECLARATION OF GIFT MADE BY ________________________ TO THE HINDU
UNDIVIDED FAMILY OF ___________________ I,_____________________________,
residing at_________________________________________________, do hereby declare
and affirm as under:
1. That out of natural love and affection borne by me towards the Hindu Undivided Family
of_______________, I have made a gift of Rs.______ (Rupees _________________ only) as
per the following details: By Cheque No.________, dated __________, drawn on Bank
____________________, ________________ Branch, in favour of
2. The above Gift has been duly accepted by ________________________, as Karta of his
Hindu Undivided Family and has been duly acknowledged hereunder.
3. This Declaration of Gift is made to record the fact that I have made this Gift in favour of
the Donee as above, who now has the absolute right, title and interest in the gifted amount.
Date: ___________, 200__
___________________ (Signature of the Donor)
ACKNOWLEDGEMENT OF GIFT I, ________________________, hereby acknowledge having received the above gift made to my Hindu Undivided Family by_________________________. Date: ___________, 200__
___________________ (Signature of the Donee as Karta of his HUF)