Hindu Undivided Family (HUF) : Meaning , Tax Benefits and More

Hindu Undivided Family (HUF) is considered as a separate legal entity. Due to this, forming a HUF can be an effective tax-saving mechanism for your family. A HUF has its own PAN and files ITR separately from its members. Not only Hindu families, but also Jains, Sikhs and Buddhists can form HUFs.

In this article, we will discuss what the meaning of HUF is.

Definition of Hindu Undivided Family (HUF)

Hindu Undivided Family (HUF) has been defined as consisting of all persons who have lineally descended from a common ancestor, along with their wives and unmarried daughters.. 

HUF is given the status of a unique legal and tax entity. The eldest male member who  typically acts as the family’s head is known as ‘Karta’. Until 2016, a woman was not allowed to be a HUF’s Karta. However, in a landmark case, Delhi High Court’s ruling favored a female being Karta of a HUF. However, this ruling is yet to be incorporated in the Income Tax Act, 1961.

HUF generally has assets in the form of an ancestral property, a gift, a property acquired from the sale of joint family property, a will or a property that has been donated by the HUF members to the common pool. HUF’s male members are known as coparceners, while the female family members are simply referred to as members. The exclusive right for the HUF’s division is reserved for the coparceners.

How to form HUF?

There are many benefits of HUF, and a major one is the tax benefit. No contract is needed to form a HUF. In fact, it is formed automatically in a Hindu family. However, getting a HUF registered through a legal deed is always advisable.

For getting a HUF registered, there are some requirements such as:

Creating HUF deed

• A HUF deed is a legal document which states the name of Karta and all the coparceners which are a part of HUF. Along with these names, the corpus as well as the business of HUF is also mentioned in this deed. This deed is one of the most crucial documents in the complex structure of the Indian Income Tax Laws.

Applying for a HUF PAN Card through Form 49A

• A HUF has its own PAN Card, which is necessary for filing ITR. To apply for a HUF PAN Card, an application using Form 49A needs to be made. This can be done online or offline depending on your choice.

Opening a HUF Bank A/C

• Necessary documents, including HUF PAN Card & Karta PAN Card, need to be submitted for opening a HUF bank account. All the documents must be authorized by the HUF’s rubber stamp. 
• Once all the documents are verified and the bank account is opened successfully, HUF can receive payments, enjoy tax benefits, make HUF corpus with money received as gifts from relatives and/or assets acquired by inheritance/will. 
• However, personal property and funds must not be transferred to the HUF account since the income received from them will be taxed under personal income as per Income Tax Act, 1961’s Section 64 (2).
• The HUF bank account is managed by Karta, and his signature is required for every transaction made by this account. Every family member of HUF is allowed to pool their income in this corpus account.

Tax Benefits of Forming a HUF

Since HUF is considered a separate entity from its members, an independent PAN Card is issued for it. This PAN Card enables HUF to enjoy tax benefits. Let’s discuss these tax benefits below:

Income Tax Benefits

• Being a separate tax entity, a HUF enjoys a basic tax exemption of Rs. 2.5 lakh. In addition to receiving income tax benefits as an individual, one can also avail the additional basic tax exemption of Rs. 2.5 lakh annually by being a HUF member.

Owning a Self-acquired House

• According to the provisions of the tax laws, if an individual owns more than one self-occupied property, one property out of all such properties can be claimed as self-occupied. The rest of the properties are taxed as let-out properties. Similarly in the case of a HUF, it can own a single self-occupied property and the rest of the properties of such nature will be taxed as let-out properties only. A HUF can avail a home loan for purchasing a residential property and receiving tax benefits of up to Rs. 1.5 lakh for loan repayment, under Section 80C of the Income Tax Act and Rs. 2 lakh on the home loan interest.

Life Insurance Policy

• Tax benefits can be claimed by individuals during a year for certain payments, such as for buying an insurance policy. Similarly, a HUF can also claim tax benefits under Section 80C which allows a maximum amount of Rs. 1.5 lakh to be claimed as a deduction.

Investments

• Just like regular citizens of India, a HUF can also invest in various tax saving schemes to avail tax benefits of up to Rs. 1.5 lakh under Section 80C. Tax deductions can be claimed on the amount deposited by HUF in PPF accounts of its members. However, a HUF is not allowed to open a PPF account in its name.

Health Insurance

• By being a HUF member, an individual can claim additional tax benefits, on health insurance premiums, of up to Rs. 25,000. If the Karta is a senior citizen, tax benefits of up to Rs. 50,000 can be availed by him.

Incomes for which HUF is not Taxed

HUF is not liable to pay any tax in case of the following incomes:

• If the income arises from Stridhan, it is not taxable to HUF. Stridhan includes all movable, immovable property, gifts, etc. received by women prior to getting married.
• If a member of HUF transfers or converts his self-acquired property without proper consideration, or has undervalued such a property, HUF is not liable to pay tax.
• If the gift comes from HUF members or from HUF members’ relatives, HUF does not have to pay any wealth tax at the time of gifting.
• Income of impartible estate, though it belongs to the family, is taxable in the hands of the estate’s holder, not the HUF.
• HUF is not taxed for the income from a daughter’s individual property even if such a property is vested into HUF by her.

Conclusion

HUF, like any other scheme, has its own good and bad aspects. All these aspects need to be kept in mind while registering a HUF. Karta, being the head of the HUF, must be aware of gifting a property to a particular family member. The specific person would only be able to receive the property as per the legal norms. If you found this article to be helpful, do browse through the rest of our articles.