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Tax Planning

Hindu Undivided Family (HUF)

Till now, in this module, our learnings are limited to how taxes are levied on the income of an individual, but there is another type called Hindu Undivided Family (HUF), and they are taxed quite differently than an individual. In this section, we will discuss taxes levied on HUF. But before we start, let us first get an overview of the Hindu Undivided Family (HUF). 


What is HUF?


The definition of Hindu Undivided Family (HUF) originates from the Hindu law, which states it as a family of “all males lineally descended from a common ancestor and includes their wives and daughters.”


Though HUF is not defined in the Income tax Act, 1961 (the Act), It is treated as a separate entity for the purpose of taxation. HUF is included in the definition of person under the provisions of section 2(31) of the Act and income tax is chargeable on every “person.”  Hence, HUF is deemed to pay the income tax and income earned by it is assessable in its own hands as per the tax slab rates given (discussed later).  Also, Jain and Sikh families are treated as HUF for the purpose of the Act.


Why does an HUF need to be formed?

Now the most important part to be understood here is that there is no provision for the HUF to be formed. It is automatically created in the following two situations:


Situation 1: When you possess ancestral property, soon after getting married your HUF comes into existence.

Situation 2: When you do not possess ancestral property, then soon after you have your child, (whether girl or boy) born, the HUF comes into existence.

Now the question arises as to why a HUF?


Since HUF is treated as a separate entity for the purpose of taxation, it also gets the advantage of the basic exemption limit and deductions (as shown below) under the provisions of the Act. 


Deductions: An individual can also take the advantage of claiming deductions under the provisions of section 80C of ₹1,50,000.


Basic Exemption limit: An individual can take the advantage of the exemption limit of ₹2,50,000 by creating and HUF.


How to form an HUF?

HUF can be formed in three simple step as mentioned below:


Application for PAN card:

Since HUF is a separate entity, it requires a PAN card for filing the income tax return separately. In a separate file, HUF will be able to claim the benefit of the minimum slab rate and deductions.


Opening a Bank Account:
Once a PAN card is received, a bank account is required to be created in the name of HUF to carry out all the transactions pertaining to the HUF.


Rubber stamp:
Before getting the HUF deed prepared, do get the stamp in the name of HUF prepared for affixing the name of HUF, in all the important documents for records.


HUF deed:
A deed is to be created which is referred to as the formal written document for the record of the names of the Karta and the members of the HUF. Karta is the eldest male member of the family. 


How does an HUF work?


This section constitutes as one of the most significant parts of the entire process of creation of an HUF. Apart from saving taxes, HUF is altogether a separate entity which can run on its own and possess income and expenses. It can also have its own assets, it can raise capital, earn income and much more.


Let us understand step by step on how this process works in case of HUF:

Raising capital


For any entity or organisation, one of the most important elements is infusing capital. This capital can be raised in several ways in case of HUF which are also tax free. 


One of the most popular ways of raising capital which are also exempted from tax is by receiving gifts as mentioned below:

  • Any monetary gift received by an HUF from a relative.
  • Any monetary gift received by an HUF on the occasion of marriage of an individual;
  • Gifts received from the non-relatives, the aggregate value of the does not exceed Rs. 50,000/-
  • Gifts received from the members of HUF.

Enhancing capital

After creating capital, the HUF can enhance its capital in many ways. It can also earn income from various methods except income from salary and use the income earned in creating more capital.

Some of the ways in which HUF can earn income are:

  • Investing in shares or other securities
  • Running a business
  • Rental Income
  • Interest income
  • Other sources of income.

Filing of Income tax return:

As mentioned before, HUF is a separate legal entity and will be required to file income tax returns. For this purpose, it shall be required to compute the taxable income after claiming all the related applicable deductions prescribed under Chapter VI-A of the Act. HUF shall be taxed under the same slab as chargeable to an individual.


Incomes not chargeable to tax
The following incomes earned by the HUF shall not be chargeable to tax:

  • Income arising from a self -acquired property, which has been converted or transferred by a member into the property of the joint family.
  • Personal income of the individuals not taxable in the hands of an HUF.
  • Income from the individual property of the daughter is not taxable in the hands of HUF even if such property is vested into HUF by the daughter.
  • Income arising from the property of women (stridhan) cannot be taxed in the hands of a HUF.

Points to note: 

  • The HUF accounts cannot be opened with joint holders.
  • No nominee can be appointed for the HUF accounts.

Where can an HUF invest?

There is no bar on HUF for investing in either moveable or immovable property. However, it is subject to taxation as prescribed under the Act.

  • HUF can purchase land, buildings etc. It can put them on rent and earn rental income through it.
  • It can invest in shares or other securities. 
  • It can invest in tax free government schemes, mutual funds, bonds etc.
  • It can also apply for life insurance policies in the name of its members and pay premiums.
  • The HUF as an entity cannot invest in government's small savings schemes, such as the PPF, NSC, monthly income schemes, recurring deposits and other time deposits.

In general, there is no bar on any kind of investments made by the HUF subject to the provisions of the Act.

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