HUF - Hindu Undivided Family Act And Its Tax Benefits

1.       What is HUF?

HUF means Hindu Undivided Family. You can save taxes by creating a family unit and pooling in assets to form a HUF. HUF is taxed separately from its members. A Hindu family can come together and form a HUF. Buddhists, Jains, and Sikhs can also form a HUF. HUF has its own PAN and files tax returns independent of its members

The essentials of HUF are:

·         Hindu, Jains, Sikhs, and Buddhists shall be considered Hindus for the purpose of this definition.

·         There should be a family, i.e. a group of people more than one.

·         The family should be undivided, i.e. living jointly and having a sense of commonness among themselves.

·         Lastly, there must be some assets or ancestral property that they have inherited or will inherit.

2.       Taxation of HUF

A HUF is a legal entity and is assessable for tax separate from its members. Its income is assessed under the different heads of income and taxed as per the income slab rates. A PAN Card and filing of tax returns are done in the name of the HUF. Deductions under Section 80C (to a limit of 1.5 lakh) and chapter VI A, exemptions under Sections 10 to 13A, as applicable can be claimed.

Ways to reduce tax outgo with a HUF

·         Rental Income from the property: Rental income from a property could be received on behalf of a HUF instead of an individual account.

·         Business Income: Profits generated out of the family business, in the name of a HUF, shall be taxed accordingly and exemptions will give more leverage on tax saving.

·         Remuneration to Karta and members: Remuneration to Karta and other family members is an allowable deduction from income of an HUF.

·         Loan to HUF members: If the business, capital or investment of the HUF is expanding, then such expansion can be done in the individual names of the members of HUF by giving loans to the members from the HUF. The HUF may or may not charge interest on the loans given.

·         Family Settlement or Arrangement: The sole purpose of the family settlement should be to settle existing or future disputes regarding property, amongst the members of the family. Since this arrangement does not involve the transfer, it would not attract gift tax, capital gains tax, or clubbing. In a family arrangement, tax incidence is considerably reduced or it may even become nil.

 

 

3.       Who is a Karta?

The eldest member of the family will be the head of the Joint Family. He is known as the 'Karta', and he is the main person responsible for the business and finances of the family. At the death of  Karta, the next eldest member shall become the Karta of the HUF.

 

4.       Who is a Coparcener?

The Hindu Coparcenary is a narrower body within the HUF.  These are the individuals (known as the 'Coparcener') who acquire an interest in the joint family property by their birth.

 

5.       Advantages and Disadvantages of HUF

 

a.       Advantages:

 

·         Several exemptions can be claimed by the HUF in its income tax returns. A HUF is taxed at the same rate as an individual.

·         An adopted child shall also become a member of the HUF.

·         The joint family has a lot of scope of disagreements and conflicts due to a difference in opinion, but since the Karta has the ultimate and absolute power, there shall be effective management.

·         The existence of HUF is perpetual. The death of the Karta will not affect the workings of the HUF as the next eldest member will resume the position of the Karta.

·         There is a constant balance between the powers and liabilities under the HUF. The members and the coparceners do not have control over the management of the HUF, and hence, their liability is limited only to their share in the property. Karta has total control over the management and therefore is entirely liable for the HUF businesses.

·         The trust amongst members ensures overall cooperation since all the members of the HUF are relatives and have a certain A sense of loyalty towards each other.

       

b.      Disadvantages:

·         Since the HUF does not accept members other than family members as part of the HUF, it is challenging to get additional capital and therefore, the scope of the business is hampered.

·         Due to the unlimited liability faced by the Karta, he may not be able to take challenging and risky business decisions in favor of the HUF.

·         The Karta may be wrongfully held liable for the actions of the other members of the HUF.

·         Conflicts may arise in the family due to the dominance of the Karta.

·         The Karta may not possibly be the most qualified person to take on the business of the HUF.

·         Since every member has some right on every asset of the family, the common property of the HUF cannot be sold without the consent of every member involved. Hence, the partition of the HUF is even more complicated than opening a HUF.

Currently, joint families are losing their importance as there are several cases wherein members of the HUF are fighting over property.

 

 

6.       How is a Hindu Undivided Family Act formed?

A HUF is formed automatically at the time a person gets married, and cannot be created by contract. Other than a Hindu family, Jains, Sikhs, and Buddhists can also form a HUF, even though they are not governed by the Hindu Law. A single person cannot make a HUF. Once the HUF is formed, it must be registered in its name

 

Documents required to form a HUF

·         HUF Deed/affidavit - The HUF Deed is a written legal a document that contains all the details of the Karta, Coparceners and the family business. It also contains a declaration by the members, that the Karta has the authority to govern the transactions and accounts of the family.

·         PAN Card - The family must obtain a PAN card in the name of the HUF, either online or manually.

·         Bank Account - A bank account in the name of the HUF must be opened, which will be used for all transactions of the HUF

   

Other than the above, the following documents also need to be maintained by the HUF in its name:

·         Demate account in case it makes investments.

·         Books of Accounts and documentation of all investments and expenses, which must be signed by the Karta.

Below is the format of HUF affidavit:

AFFIDAVIT

I __________________ (Name of Karta) Son of                                                  (Name of father) Resident at    _________________________  (Address) of ____Years. Adult do hereby declare:-

1. That I am Karta of ________________ HUF
2. That I have received on behalf of the H.U.F gift of Rs 1000 by way of CASH from my brother _______________ this formed a corpus of the HUF.
3. That the HUF at present is consisting of the following members :-
• ___________________________ Residing at _________________________________________________________ (Detail of Karta)
• ___________________________ Residing at _________________________________________________________(Detail of Co parcenur)
• ___________________________ Residing at _________________________________________________________(Detail of Co parcenur)
• ___________________________ Residing at _________________________________________________________(Detail of Co parcenur)

That the above statement is true to the best of my knowledge and belief.

Declare this on Date: DD/MM/YYYY

__________________

WITNESS:

1.

2.