1. What is a HUF?
HUF refers to the Divided Hindu Family. You can save taxes by creating a family unit and assembling assets to form a HUF. HUF taxes separately from its members. The Hindu family can come together and form a HUF. Buddhists, Jains, and Sikhs may also form HUF. HUF has its own PAN and file tax records without its members.
2. How is HUF taxed?
- HUF has its own PAN and file a separate tax return. A separate Hindu family business is being formed as it has a separate business and its members.
- Deductions under section 80 and other exemptions may be claimed by HUF in its tax administration.
- HUF can take out health insurance for its members.
- HUF can pay a salary to its members if it contributes to its HUF operations. These salary expenses can be deducted from HUF income.
- Investments can be made with HUF income. Any profits from this investment are taxable at the hands of HUF.
- HUF is taxed at the same rates as per person.
| Income from various sources | Income of Mr. Chopra before formation of HUF | Income of Mr. Chopra after formation of HUF | Income of HUF |
| Salary | 20,00,000 | 20,00,000 | |
| House property rent | 7,50,000 | – | 7,50,000 |
| Standard deduction on house property | 2,25,000 | – | 2,25,000 |
| Income from house property | 5,25,000 | – | 5,25,000 |
| Total taxable income | 25,25,000 | 20,00,000 | 5,25,000 |
| Section 80C | 1,50,000 | 1,50,000 | 1,50,000 |
| Net taxable income | 23,75,000 | 18,50,000 | 3,75,000 |
| Tax payable | 5,53,625 | 3,91,400 | 7,725 |
| Total tax paid by Mr. Chopra & HUF | 3,99,125 |
| Tax saving due to forming an HUF | 1,54,500 |
3. How to form an HUF?
Although there are tax benefits to building a HUF, you must also meet certain conditions -
- One person cannot build a HUF, it can only be built by a family.
- HUF is automatically created during the wedding.
- HUF contains one ancestor and all his descendants, including their wives and unmarried daughters.
- Hindus, Buddhists, Jains and Sikhs may form HUFs.
- HUF usually has items that come as a gift, a will, or ancestral property, or property obtained from the sale of shared family property or property donated in a standard collection by HUF members.
- Once the HUF is established it must be officially registered in its name. HUF must have a valid title deed. The title deed will contain the details of the members of the HUF and the business of the HUF. The PAN number and bank account must be opened in the name of HUF.
4. Disadvantage of forming an HUF
While HUF seems to be the best way to save taxes as a family, it does have its drawbacks. Equal member rights: The worst thing about opening a HUF is that its members have equal rights locally. Ordinary property may not be sold without the consent of all members. Any addition to the family, by birth or marriage, becomes a member of the HUF and receive equal rights. HUF may be too large to handle. Separation: Probably the worst dream of opening a HUF to close it. The only way HUF can be disbanded by separation. All members must agree to disband the HUF. For less than part, assets are provided to members which may cause a lot of controversy and which may be a legal issue. Integrated family compliance loss system: HUF has been recognized as a separate tax-exempt business by the revenue department. However, in modern times, when nuclear families are the norm, HUF loses value. There have been a few instances where couples or families are fighting over common household expenses, forgetting to pack up. The divorce rate is rising, so HUF as a tax vehicle is losing value. The HUF continues to test as such until separation: Once the HUF is established, you must continue to file its tax returns, unless a split occurs. Any request for separation is made to the inspector. The probation officer, upon receipt of the claim, must conduct an investigation after giving the members due notice. Revenue from a divided property is taxable as income per member. If a member makes another HUF with his wife and children, the local income transferred from the original HUF is taxed at the hands of the new HUF.
Frequently Asked Questions
Who is the Karta of an HUF?
The head of HUF is called Karta, he is the highest male member of the family.
Can a Woman be HUF Karta?
Yes! Until January 2016, the woman would not be a HUF Karta. But in a landmark case, the Delhi High Court ruled in favor of the woman as the HUF Card. However, the same is not yet included in the Income Tax Act yet.
Who are HUF Coparceners?
All members of the Karta family can be members of the HUF. The male members are called coparcers, and the female members are simply called members. The difference between the two is that any coparcers may want to split HUF. Female members do not have this right in many parts of the country, with the exception of other states such as Maharashtra and Tamil Nadu which have allowed unmarried girls to work as coparceners. The Hindu Succession (Amendment) Act, 2005, which came into effect on 9 September 2005, eliminated this gender discrimination by giving equal rights to daughters as sons. Daughters become cousins of their father's family when they are born in the same way as sons and have the same rights as sons in family structures.
Are there a limited number of coparcers needed to run a business like HUF?
A HUF can be formed with just two members, one of whom is a coparcener. But for a business to be taxed like HUF, it must have at least two coparcers. For example, if the HUF contains only a man and a woman, then there is only one coparcener. Taxes will therefore not be taxed at the hands of the HUF unless the funds are received through the division of the HUF. It will be taxed at the hands of the sole coparcener.
Should a HUF always be a resident of India
It is not necessary for the HUF to be an Indian citizen at all times. In a situation where the control and management of the HUF is outside India, the HUF will be non-citizen. When HUF news is handled outside of India, HUF will be non-resident.
Karta of HUF sits outside India. HUF is managed by the other members residing in India. Will HUF be a non-resident?
The residency status of the HUF is not determined on the basis of where Karta resides but on the basis of where the HUF is located. In this case, although Karta lives outside India, the HUF is owned by members from India and that is why the HUF will become an Indian citizen.
Can the members of the HUF and the HUF separately claim deduction under Section 80C?
HUF is a separate tax examiner, who can apply for an exemption under section 80C. However, the member and HUF cannot apply for a deduction in respect of the same investment made or expenses incurred.
Upon the demise of the Karta, who takes over the title ‘Karta’?
When Karta dies, the old family member becomes the family Karta. Even while Karta's wife is still alive, an older son or other family member will take over.
What happens if the eldest male member of the family is an NRI?
HUF is considered an Indian citizen if the control and management of its affairs takes place in whole or in part in India. In some cases, the family card may not be a citizen. Family status will not change into a non-resident only because Karta is not a citizen unless family decisions are made outside of India.
