A Hindu Undivided Family or HUF is a legal term related to the Hindu Marriage Act and is very effective and legal way to save tax. The term HUF is not defined in Income Tax Act; it is defined under the Hindu Law as a family. A Hindu Undivided Family (HUF) consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. There are many families in India, which are undivided and incomes earned by such families are joint income as compared to individual incomes.
The family exists even after the death of the common ancestor as the next eldest male member becomes the head of the family or the Karta (manager). The person who manages the affairs of the HUF on behalf of its members is known as the Karta. A junior male member or a woman (from January 2016) can also act as the Karta with the consent of the other family members. HUF may consist of a single male member and widows of deceased male members.
HUF cannot be created under an agreement/ contract or by acts of any party or by a group of people who do not constitute the family except in the case of an adoption or a marriage. You have to be lineally descended from a common male ancestor. Buddhists, Jains, and Sikhs can also form HUFs. An adopted can become a member of HUF but cannot become a coparcener and so he/she cannot demand the partition of HUF. The male members of HUF are called coparceners while the females are called just members. Only the coparceners can demand partition of the HUF. However, Hindu Succession (Amendment) Act, 2005 removed the gender discrimination and gave equal rights to daughters as sons which means that the daughters became the coparceners of their father’s families on birth as sons having the same rights as theirs in family property.
A HUF is created automatically after the marriage of a person but it must have an income-generating asset which can only come as a gift from a relative or through a Will for all members of the HUF. Thereafter it needs to be registered in a particular name and have to acquire Permanent Account Number (PAN). It is not necessary for a member to live in the same house instead they can live separately.
Under the provisions of section 2(31) of the Income Tax Act, HUF is a separate entity for taxation i.e. taxed separately from its members, only if below conditions are satisfied:
HUFs are formed to avail the benefit of an extra PAN card legally which helps in splitting the family income and thus resulting in tax savings. An individual can claim double benefits for deductions and expenses in both capacities, which reduces his overall tax liability.
HUF income can be used to incur expenses of the family including all the members and the advantage of double taxation U/S 80C, 80D, 80CCF, 80DD, etc. can be taken. Income earned by gifts can also be distributed to the members which remain tax-free in the hands of the members. HUF can pay salary to its members for their contribution in its functioning, which can also be deducted from the income of HUF. The Karta is provided with an additional tax exemption of Rs. 1.8 lakhs along with the benefit of lower tax rate including 10% on income up to Rs. 500000 and 20% up to Rs. 800000.
HUF is required to file income tax return every year and if the turnover exceeds 25 lakhs/1 crores, a tax audit is required to be conducted by CA. HUF may be a resident or a non-resident in India depending on where the control of the HUF are situated.
The following incomes will not be taxed as income of HUF:
It must be noted that in case of Hindu Undivided Family (HUF), all the members of the family have an equal right in the assets of HUF and the property cannot be sold or transferred without the consent of all members. HUF having only a few members may run smoothly as the problem increases with the increase in a number of coparceners. HUF formed only for the purpose of tax saving may work only for the initial years until the tax authorities feel that the HUF has been created to launder money.
The only way to dissolve HUF is a partition and will take place only after the full partition of assets of the HUF among its members, which can lead to many disputes & may require legal procedures.
HUF deed is a written formal document on a stamp paper stating the names of the Karta and the coparceners (members) of the HUF. It contains details of HUF members and the business of the HUF. The name of the HUF is the name of the Karta followed by the word HUF. The fees charged by notary public agents for creating a HUF deed format is around Rs. 100/-. It is not mandatory to create HUF deed, as PAN card and bank account can be opened even without HUF deed, but it is better to have written document in the form of Hindu Undivided Family (HUF) deed.
Format of Hindu Undivided Family (HUF) Creation Deed
I, ________________ son of __________________ residing at ______________________ aged ___Adult do hereby declare-
For __________________ HUF