Hindu Undivided Family (HUF) and its tax benefits
Hindu Undivided Family, commonly known as HUF is a separate entity from its members for the purpose of Income Tax assessment.
The term is defined under the Hindu Law as a family which consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. So basically a Hindu Undivided Family is not created by any Act but by status.
Who can form HUF?
A HUF cannot be formed by an individual or a coparcener (a person who acquires a right in the ancestral property by birth and who has a right to demand partition in the HUF property).
A married male can form a HUF. Members of the family including the Father, his wife, children, their wives and their children will be the members of this Hindu Undivided Family. Now, if a father of two daughters passes away, HUF can be carried forward by the daughters (The elder daughter will be Karta).
The Karta: The eldest male person of this Hindu Undivided Family is called Karta and he usually handles the affairs. He has to apply for a separate PAN as a Karta. With the consent of the other members of HUF, a junior male member can also be the Karta of family.
The Members: People other than Karta are the members of the HUF. The wife, the sons and unmarried daughters can be called as Members of a HUF. Even a father and his unmarried daughter can form a HUF. As mentioned in the beginning, HUF is a separate entity from its members. So the income which is brought to the common pool of it by its members or the income which is generated from the assets in the common pool will also be taxed separately as HUF income and shall not be taxed as members’ income.
Difference between a Member and a Coparcener:
A coparcener and a member of a HUF are two different entities. A coparcener has the right to demand partition in the HUF property. So, in case of a partition, a coparcener would receive his/her share while a member would be entitled to receive maintenance from the HUF. The family property managed by Karta is considered the joint property for all the coparceners until they ask for a division.
Taxability of HUF income
Once the separate PAN has been obtained, the Hindu Undivided Family will be required to file Income Tax return every year, just like every other individual. Tax will be applied to HUF income at the slab rate which is applicable to individuals. HUF will also enjoy the basic exemption limit of Rs. 2,50,000 which is available to individuals.
Now, if a Hindu Undivided Family contributes funds to a partnership firm, the profits and interest received from it are considered as income of a HUF, because the investment was done by HUF as a whole, and not just by Karta. However, if the Karta is also paid salary from the same firm for his contributions, such income would be considered his individual income.
HUF can effectively be utilised for Tax planning. To understand it simply, if a member is having income which is taxed at the highest slab rate (30 %) if that income is brought to the common pool of HUF it may be taxed at the lower slab rate and at the same time HUF will also enjoy some of the deductions under chapter VIA thus reducing the tax burden on the individual member.
Deductions available to HUF
As discussed earlier, HUF is a separate legal entity and it also enjoys the basic exemption limit of Rs. 2,50,000 and deductions which are available to an individual. Here are some of section 80 deduction which is available to HUF:
|Section||Deduction for||Allowable if|
|80C||Life Insurance Premium||Paid for the Policy of any of the members of HUF|
|Payment under a contract for a deferred annuity||Paid for the Policy of any of the members of HUF|
|Public Provident Fund (PPF)||Any contribution made towards PPF account of a member of HUF|
|Unit Linked Insurance Plan of UTI & LIC Mutual Fund||The contribution made in the name of any of the members of HUF|
|Tuition fees||Paid for children of any of the members of HUF|
|Certain payments for purchase/ construction of residential House Property, Repayment of Housing Loan||Paid for the House Property purchased or constructed by HUF and the expenses are wholly and exclusively for the purchase of the property|
|Subscription to Equity Linked Saving Scheme||Paid for the scheme which is either in the name of the HUF or any of the members of the HUF|
|Term deposit for a fixed period of not less than 5 years, with a scheduled bank or with Post Office||Paid for the deposit in the name of HUF or any of its members|
|80D||Health Insurance Premium / preventive health check-up||Paid for any of the members of the HUF|
|80DD||Expenditure on medical treatment of a person with a disability||Paid for any of the members (with a disability) of the HUF|
|80DDB||Expenses paid for medical treatment of specified diseases and ailments||Paid for the treatment of any of the members of the HUF who are completely dependent on the family|
|80TTA||Interest on deposits in Savings Bank Account||The interest is earned on the Savings Bank Account in the name of HUF|
If HUF is carrying any business, then the expenses in relation to the business can also be claimed while calculating the tax on HUF income. If the Karta and members of HUF are working for the HUF business, than any salary or remuneration paid to them can be claimed as an expense from the HUF business income.
Tax Planning with HUF
You would have understood by now that apart from its members, HUF also enjoys the basic exemption limit of Rs. 2,50,000 as well as the deductions as mentioned above. This can be utilised to the advantage of the members. Let’s take a look at a situation for better understanding.
Dhruv and Khushboo are married and have a son named Tanay. Khushboo earns a Salary of Rs. 10 Lakh per year. Dhruv earns Rs. 18 Lakh from his business and also has an ancestral property from which he earns rental income of Rs. 5 Lakh. So at present, their Tax Liability is as follows:
|Salary Income / Business Income||18,00,000||10,00,000|
|Rental Income from ancestral property||5,00,000||–|
|Total deductions under section 80||1,50,000||1,50,000|
|Total Taxable Income||21,50,000||8,50,000|
|Tax Liability as per Slab Rate||4,84,100||97,850|
|Combined Tax Liability||5,81,950|
Now, if they form an HUF, they can
- Divert Rental Income from ancestral property to HUF.
- Register a business in the name of HUF and also divert a portion of Dhruv’s business income to HUF (say Rs. 6,00,000).
- Make investments and payments from HUF to claim a deduction. For eg., life insurance premium paid by HUF for the life of Dhruv, Khushboo and Tanay will be allowed a deduction from HUF income.
So now the Tax Liability will be as follows:
|Salary Income / Business Income||12,00,000||10,00,000||6,00,000|
|Rental Income from ancestral property||–||–||5,00,000|
|Total deductions under Section 80||1,50,000||1,50,000||1,50,000|
|Salary Income / Business Income||12,00,000||10,00,000||6,00,000|
|Total Taxable Income||10,50,000||8,50,000||9,50,000|
|Tax Liability as per Slab Rate||1,44,200||97,850||1,18,450|
|Combined Tax Liability||3,60,500|
As you can see, they were able to save Rs. 2,21,450 (5,81,950 – 3,60,500) by forming an HUF and diverting some of the incomes.
HUF transactions should be thought through and planned properly. You can also take help from a CA or a tax expert just to be sure that there are no violations of tax laws.
Can HUF own any asset?
Any assets received in the following situation would form part of the HUF asset pool:
- Assets received on the partition of a larger HUF of which the coparcener was a member. For eg., Mr B is a coparcener in a HUF in which his father Mr A is the Karta. Now in case of partition of that HUF, the assets received by Mr B will form part of his own HUF.
- Assets received as gifts by the HUF from relatives and friends.
- Assets received by way of inheritance through a will.
- Any member of the HUF can transfer or bring his / her individual assets to HUF asset pool. However, it won’t be beneficial to the individual member since the transfer of asset will not result in the transfer of Tax Liability on income from such asset. So the income from such transferred assets will continue to be taxed in the hands of the individual members.
Partitions of HUF
Partition in HUF is the most common way of reducing the Tax Incidence in HUF.
In Hindu law, these partitions can be either Total or Partial.
In Total Partition, all the members will cease to be the ‘members’ of a HUF and the property will be distributed amongst them. After complete partition, the members will continue to be taxed as individuals.
In Partial Partition, only the members willing to leave will cease to be the members of HUF and the rest will continue to be the members of HUF.
However, according to the Income Tax Act, there’s no concept like Partial Partition. So there’ll either be Total Partition or no partition.
1. Who is responsible for filing HUF return?
Karta is responsible for filing the HUF return. The due date for filing HUF return is the same as individual i.e 31st July. Karta is also required to verify the HUF return.