Hindu Undivided Family (HUF) is not defined under the Income Tax Act but is covered under the Hindu Law. By definition, it consists of all individuals who are lineally descended from a common ancestor and also comprises of unmarried daughters. HUF is not formed by a contract but by the status of a family i.e., it is created automatically in any Hindu Family. Having a common ancestor is a pre-requisite to form a HUF.
Requirements to form a Hindu Undivided Family (HUF)
Minimum two members are required to form a HUF, constituting a joint family. Owning an estate or a property is not mandatory to form a HUF. The Hindu Law though does not govern Buddhists, Jains, and Sikhs; it can be treated as a HUF for taxation purpose.
Benefits of forming a HUF
One of the major benefits of Hindu Undivided Family is that it is considered as a separate legal entity. This entitles HUF to obtain a separate PAN card and bank accounts in the name of the HUF. Once a HUF is formed, typically the oldest member of the family becomes the “Karta” and is provided with an additional exemption. In addition, the tax slabs are lower when compared to that of regular corporates. Until January 2016, women were not eligible to be the Karta of a HUF. However, the Delhi High Court, in a landmark case, gave the decision in favor of a woman being the Karta of HUF. The decision is yet to be implemented in the Income Tax Act.
How is HUF Taxed?
• HUF is eligible for deductions under section 80 and other relevant exemptions
• Allowed to take insurance policies for its members
• Can also pay salary to its members should they contribute to HUF functioning
• Investment is allowed from HUF income and returns from such investments are taxable.
Income of HUF
Any income that is derived from the below may be regarded as income of HUF:
• Profit from business including profession
• Income from house property
• Capital gains
• Other sources
Given that the HUF is a separate legal entity; it is not entitled to any salary income. Also, any income that is derived from investments made by the HUF is assessed and taxed separately.
Who should opt for HUF?
HUF arrangement suits those taxpayers who have income from ancestral property and expects to inherit these assets (both real and financial). A taxpayer will be able to divert the inheritance to the HUF account and thus preventing personal tax liability from increasing. In addition, HUF is also beneficial to taxpayers with higher savings rate.
Legal formalities involved while forming a HUF:
• Form corpus – A capital asset can be used to form the HUF. It can be any ancestral property, assets received as a gift from relatives or through a will.
• Register a deed – A deed is required on stamp paper declaring the formation of the HUF. It should include information of the Karta and the co-parceners. In addition, sources of funds in the corpus are also mentioned. Once the declaration deed is made, the Karta can apply for a permanent account number (PAN) for the HUF as a separate legal entity.
• Opening bank account – Once the PAN is allocated, open a bank account in the name of the HUF.
We hope that you have got a detailed insight on Hindu Undivided Family and its working. Should you wish to know more about HUF or any taxation related matter with HUF, feel free to connect with us and we shall be glad to assist.