HUF Formation: Effective way to save the tax

Hindu Undivided Family (HUF) is known to be a very good tax saving tool in India in an ethical & compliant way. Though it is not so widely used by the people as it could have been. Let’s understand who can form an HUF & how is it taxed under the Income Tax Act : 

Formation of HUF

• Though by words it seems that HUF can be created by Hindus only but even Buddhists, Jains, and Sikhs can also form an HUF.

• Once any family member gets married, his HUF is automatically created.

• HUF means consists of an ancestor, all of his lineal descendants including their wives & daughters but not the spouses of daughters.

• The senior most member of the family is called the KARTA of HUF.

• All the members of the family can be the member of the HUF.

However, only the daughters who are born in the family, will get the coparcenary rights after the Hindu Succession (Amendment) Act 2005. Other female members, who come into the family by virtue of marriage, are still treated as members only. Thus, they are not entitled to ask for the partition but are entitled for maintenance and shares as and when partition takes place. It means that daughters are not entitled to the share in father’s property if the father had passed away before the effective date of the applicability of the Hindu Succession (Amendment) Act 2005.

• An HUF should have a legal deed explaining details of HUF members & its business of the HUF.

• A separate joint Hindu family business is created since it has an entity separate from its members. HUF may get its assets from its members through gift, will, ancestral properties or contribution by any member to the common pool of HUF.

Taxation of HUF

• HUF is an independent assessee under the Income Tax Act & hence taxed separately from its members, hence it has its own PAN and files its ITR separately.

• Like individuals HUF’s also get the benefit of minimum exemption limit & slab wise tax rate along with deductions like Section 80C, 54, 54F etc.

• HUF can take an insurance policy for its members & claim the deduction under section 80C.

• HUF can pay salary/remuneration to its members & can claim the same as an legitimate expense.

• Income from investment made by HUF would be taxed in the hands of HUF only.

• The tax saving by creating the HUF is achieved by transferring of assets to the common pool of HUF and then get getting the income taxed in the hand of HUF. For example, if Mr. A gets any ancestral property then he can transfer it to the common pool of HUF. IF he does so, the income from this property would not be taxed in his hands but in the hands of HUF. HUF would claim the benefit of tax exemption limit and deduction like Section 80C etc and this way the taxability of such income would be much lower in the hands of HUF than it could be otherwise if the income was taxed in the hand of the Mr. A himself.