A Hindu Undivided Family (HUF), as its name suggests is Joint Family which is taken as a separate entity from that of the Individual Members consisting in HUF. The Head of the Family (i.e. Father/ any elected person in case of the death of Father) is called Karta which operates the business of the HUF.
How HUF is created
- HUF does not arise from a contract. But, it is a Creation of Law.
- A HUF is automatically created at the time of marriage.
- Hindus, Buddhists, Jains and Sikhs can form HUFs.
- HUF usually has assets which come as a gift, a will, or ancestral property, or property acquired from the sale of joint family property or property contributed to the common pool by members of HUF.
- HUF consist of Co-Parceners (who are Family Members) and the distant relatives i.e. called as Members of HUF.
- Coparceners: Coparceners are the Family Members and it consists of 4 levels of Lineal descendants including the first male ancestor.
- X (Karta)
- Son/ Daughter of Mr. X
- Grandson/Granddaughter of Mr. X
- Great Grandson/ Great Granddaughter of Mr. X
- Wife is not considered as the direct part of HUF i.e. Coparcener. She will be a Member in Husband’s family HUF. Although, She will be a Coparcener in her Father’s Property. ALL COPARCENERS ARE MEMBERS, BUT ALL MEMBERS ARE NOT COPARCENER.
- Important point to be considered is that a HUF can be formed with just two members one of whom is a coparcener. But for an entity to be taxed as a HUF, it should have at least two coparceners. For example; When any HUF consists of only Husband and Wife, then there is only one coparcener (because the wife is a member but not a coparcener) and therefore, in such case income can’t be taxed in hands of the HUF. It will be taxed in the hands of Individual Coparceners.
- Till the time the HUF has an empty kitty, it is like a balloon that no one has yet blown air into. A balloon can rightfully be called a “ball”oon only when it swells up with air inside it. An HUF too is inert and dormant without funds just like a balloon without air
- The HUF can be formed with money received as gifts from relatives. But there’s again a tax implication here. While there is no tax on gifts received by an individual from specified blood relatives, the HUF does not enjoy this exemption. “The HUF is not an individual, so it has no relatives. Any money it gets will be treated as a gift from a stranger. If the value of the assets received as gifts in a year exceeds 50,000, it will be deemed as income of the HUF and taxed accordingly”
- Taxation of HUF
- HUF has its own PAN and files a separate tax return. A separate joint Hindu family business is created since it has an entity separate from its members.
- Deductions under section 80 and other exemptions can be claimed by the HUF in its income tax return.
- HUF can take life insurance policy for its members.
- HUF can pay a salary to its members if they contribute to its functioning of the HUF. This salary expense can be deducted from the income of HUF.
- Investments can be made from HUF’s income. Any returns from these investments are taxable in the hands of the HUF.
- A HUF is taxed at the same rates as an individual.
- Through intelligent planning, an individual can shift some of the tax inefficient investments to the HUF hotchpot so that the tax burden is lowered. Given the intricacies involved, it is best to take the help of a professional. This is also because the taxman looks at HUF tax returns with a degree of skepticism. “The income pattern of an HUF is often questioned by income tax officers“. The general belief is that the HUF has been formed to evade tax and that its accounts have been fudged.
- However, if your chartered accountant is good, he can help you cross these hurdles without putting you on the wrong side of the law or inviting a notice from the tax department.
“It is suggested to do a cost-benefit analysis. If by paying a fee of Rs 8,000-10,000 to a chartered accountant you can save 1 lakh in tax, it would be money well spent”
For Better tax planning and consultation
by CA. AnujAgrawal