What is HUF (Hindu Undivided Family)?

A HUF includes the Karta (the head of the family), and Coparceners (all the family members). Hindu law defines a HUF as a family of all persons who come from a common ancestor, including their wives and unmarried daughters. HUFs can only be created automatically within a Hindu family and cannot be created under a contract.

Even though Jain and Sikh families do not fall under Hindu Law, they are treated as HUFs under the Act.

In accordance with section 2(31) of the Income-tax Act, 1961 (hereafter called the Act), Hindu Undivided Family ('HUF') is viewed as a 'person'. HUF is a separate entity that is assessed under the Act.

The HUF has its own Permanent Account Number (PAN) and files its own tax returns.

Taxability of HUF

First, one has to determine the income of a HUF under the various heads of income (ignoring earnings exempted under Sections 10 to 13A of the Act). There are a few things to keep in mind when computing income:

• HUF funds that are invested in a company or firm may be treated as family income if the member receives fees or remuneration from the company or firm (if the fees or remuneration are earned essentially as a result of the investment of funds).
• Nevertheless, if a member earns fees or remuneration for services rendered in his capacity, it will be considered to be his personal income.
• If any remuneration is paid by the HUF to Karta or any other member for services rendered, the payment is deductible from the income of HUF if it is genuine, not excessive, and paid under a valid and bona fide agreement.

The following incomes are NOT taxed as income of HUF:

• If a member has converted or transferred his self-acquired property into the joint family property without due consideration, the income from such property is not taxable in the family's hands.
• Income from impartible estates (although they belong to family) is taxed in the hands of the holder of the estate, not in those of the HUF.
• The personal income of the members cannot be treated as the income of HUF.
• Individual income cannot be included in HUF income. Due to the fact that "Stridhan" is an absolute property of a woman, her income from it is not taxable.
• Income from the daughter's individual property is not taxable in the hands of HUF even if the daughter has transferred the property in the HUF.

1. Deduction from Gross Total Income: While calculating taxable income, HUFs can take advantage of deductions available under Chapter VI-A (as applicable).
2. Rate of Tax:
• HUFs are taxed at the same slab rates as individuals.
• If the tax payable is less than 18.5% (including cess and surcharge) of "Adjusted Total Income" a HUF is subject to Alternate Minimum Tax.

How to Create a HUF?

Tax advantages are one of the most important reasons to form a HUF. To create a HUF, however, one should be aware of the following terms and conditions:

• A HUF should be formed only by a family
• At the time of a marriage, a HUF is automatically created for the newly added member of the family.
• The HUF is made up of all descendants of a common ancestor, including their daughters and wives.
• HUF's assets tend to come in the form of gifts, inheritances, or wills.
• A bank account in the name of the HUF should be opened once the HUF has been created.
• Even though Jain and Sikh families do not fall under Hindu Law, they are treated as HUFs under the Act.

How to Save Taxes by Building a HUF?

One of the primary reasons to establish a HUF is to obtain an additional PAN card that is legally acceptable, in addition to tax benefits. Once the HUF is built, the members of the HUF will not have to pay individual taxes. After the HUF PAN card has been created, the family can begin paying its taxes individually.

HUFs can then begin filing ITRs using the new PAN card. If the family's annual income exceeds the prescribed limit, it will be taxed at 10%, 20%, and 30% of the income slab.

To help you better understand HUF, here is an example:

Consider a family consisting of a husband, a wife, and their two children. The husband earns Rs 20 lakhs per year and the wife earns Rs 16 lakhs per year. In addition, they earn Rs 6 lakhs in rental income from their ancestral land.

If the income from the ancestral land were kept separate, the rent would be either taxed on the husband or wife, or both. Now let's see how it works:

• The husband, if taxed, falls into the 30% tax bracket at present. Thus, he will have to pay 30% of Rs 6 lakhs which is Rs 1.8 lakhs in taxes.
• As the wife falls under the 30% of the income tax bracket, this would be taxed on her at 30% of Rs. 6 lakhs, which is Rs 1.8 lakhs.
• When taxed equally on husband and wife, each would have to pay 30% of Rs 6 lakhs. Ultimately, this would mean that both of them would have to pay Rs 90,000 + Rs 90,000 = Rs 1, 80,000.
• HUF, however, offers additional tax benefits on land rent. HUF members' taxes would be reduced by Rs 60,000 to Rs 70,000.

In that case, the couple will save around (Rs 1, 80,000 - Rs 60,000) Rs 1,20,000 on taxes.

Suggested Read: Other Tax-saving Options for You.

Illustration of HUF

For instance, Mr. Amit, after his father passes away, starts a HUF with his wife, son, and daughter. Mr. Amit has no siblings, so his father's property has been transferred under HUF.

Suppose Mr. Amit's salary income is Rs 20 lakhs, and his father's property rent is Rs 7.5 lakhs. In this case, he can save taxes as follows: