HUF is the best option for tax savings. It is said by a tax expert, whether we should form HUF or not. You & all would like to know as a taxpayer, whether it will be beneficial or not. So today in this post, we will try to know all about the HUF such as its meaning, advantages & disadvantage, How to create it, how to use HUf, eligibility, examples, and who can create it, etc.
Contents of this post
What is the full form of HUF?
HUF full form is Hindu Undivided Family. For the purpose of tax benefits, Hindu Undivided Family (‘HUF’) is treated as a ‘person’ under section 2(31) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act). HUF is a separate entity for the purpose of assessment under the Act.
What is the meaning of HUF?
Under Hindu Law, a HUF (Hindu Undivided family) is a family which includes all persons in a line descended from a common ancestor and includes their wives and unmarried daughters. It is created automatically in a Hindu Family. It is treated as a separate person under the income tax act. And also taxed separately from the Karta of HUF.
Jain and Sikh families even though are not governed by the Hindu Law, but they are treated as HUF under the Act. A HUF cannot be created under a contract.
Who is eligible for HUF?
HUF can only be formed by a family. A HUF is automatically created at the time of marriage. HUF consists of a common ancestor and all of his lineal descendants, including their wives and unmarried daughters. Hindus, Buddhists, Jains, and Sikhs can form HUFs. A salaried person can form HUF after getting his marriage.
A husband and wife can form a HUF but a wife can only be a member, not a co-parcener. Therefore, the HUF income will not be assessed separately. A member has equal rights but only a co-parcener can demand the partition of the HUF.
What are the benefits of H.U.F?
These are the benefits of H.U.F for a person-
- Members are liable to pay taxes just like other individuals
- Two PAN cards can be created and each of them files the taxes separately
- An adopted child can also be a HUF family member
- Members can easily avail loans
What are the tax benefits of HUF?
These are the tax benefits that can be availed after HUF creation-
1. The income tax slab for HUF is the same as that of an individual, with an exemption limit of Rs 2.5 lakh,
2. And qualifies for all the tax benefits under Section 80C, 80D, 80G, and so on. It also enjoys exemptions under Section 54 and 54F with respect to capital gains.
3. Gifts collected up to a worth of Rs 50,000 will be tax-free. A father who owns a H.U.F account can gift a property or money of higher worth to a son who owns a smaller H.U.F account, but he should specify that the gift is for the son’s HUF and not to him as an individual. Under sections 64(2) and 56(2) tax benefits can be enjoyed in such instances.
4. Huf can be used for investment in tax-free money instruments.
What are the Issues in H.U.F?
These are the issues in H.U.F for a person-
- All members have equal rights on the property
- Closing the H.U.F could be difficult
- H.U.F is losing its amenity of a tax-saving tool because of joint family issues
- A H.U.F can be too large to manage
- There can be a strong sense of insecurity among members that can keep the corpus of the account empty and as long as the corpus is empty the account is non-functional.
- If any of the members of H.U.F is willing for a partition then the process of partitioning in deposit in the H.U.F account can be impossible.
What is the example of HUF?
Let’s understand with an example How H.U.F works to decrease tax payable
example- After the death of his father, Mr. A decides to start a H.U.F with his wife, son, and daughter as members. Since Mr. A had no siblings, the property held by his father was transferred in the name of the HUF. The property held by the late Mr. Z (father) earns an annual rent of Rs 7.5 lakhs. Mr. A has an income from a salary of Rs 20 lakh. By creating a H.U.F, Mr. A can save tax, see below.
| Income from various sources | Income of Mr. A before the formation of HUF | Income of Mr. A after the 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. A & HUF | 3,99,125 | ||
| Tax saving due to forming a HUF | 1,54,500 |
Due to this tax arrangement, Mr. A saved a tax of Rs 1,54,500. Both H.U.F and Mr. A (as well as other members of the H.U.F) can claim a deduction under section 80C. Furthermore, the income of the H.U.F can be invested by the H.U.F and will continue to be taxed in the hands of the H.U.F.
Should I create HUF?
It depends on your income and tax liability if your tax payable is higher then you should create H.U.F for taking tax benefits which are mentioned above.
How to create H.U.F?
These are the steps for creating H.U.F-
1. The First step is to create a H.U.F Deed.
2. Second is the application for the H.U.F pan card.
3. Third is the application for the H.U.F bank account.
4. And the next step is to create funds in H.U.F.
Is HUF Deed mandatory for HUF creation?
HUF may be formed with or without a legal deed, though it is always advisable to pursue a business with a written document. With respect to a H.U.F, a legal deed consists of details of membership of the H.U.F, the source of funds, and the likes of it. The Deed acts as proof of the existence of the entity that has been formed.
The document should include a declaration by a family member for the name of the Karta, powers vested with the Kartha, and the entitlement of the Kartha to hold the transactions on behalf of its members. In addition to it, the document should state the capital that was invested in forming the H.U.F.
And also a supporting document is required to apply H.U.F pan and bank account. So a Declaration Deed or Gift cum declaration Deed is required to apply Pan. After getting Pan Number, you can easily able to open a H.U.F bank account.
Hence make a declaration deed for example- You can use it for making your declaration deed
How to apply for HUF Pan Card?
H.U.F pan card is mandatory for H.U.F creation. So you will have to apply for a H.U.F pan card online or offline. Followed by the formation of a deed, the Karta is required to obtain a PAN Card, which is an important document for pursuing financial transactions. The application for PAN must be made in Form 49A.
The PAN Card must be used by the entity for the filing of income tax returns and claiming applicable deductions. The application for PAN and income-tax return should consist of the signature of the Karta.
Karta can provide documents for the H.U.F pan card-
- Pan Application form signed by Karta
- Karta Identity and address proof
- H.U.F declaration deed
How to apply for a H.U.F bank account?
Karta can apply for a H.U.F bank account from any bank nearby him after getting a H.U.F pan card in hand. When you will apply for a bank account then they will demand some documents for opening a H.U.F bank account.
For example
- H.U.F pan card
- Aadhaar Card of Karta and all other members
- 1 cheque of the minimum required amount from Karta’s Personal Account.
- Photos of each member
- And More as per bank requirements.
After verification of all documents bank officer will open your H.U.F account.
Faqs on H.U.F
Karta is generally the head of the family who has the right to do all the things for the family and takes all the decisions on the behalf of the family. The head of the family can be a man or woman.
Coparcener is the person who has the right to demand the share of the property of the family if he/she wants to part away with the family with his/her share. Not all members of the HUF are its coparceners.
No, there is no name approval required for the creation of HUF.
An Accountant, GSTP, GST blogger, Website Creator, SEO Builder & Co-founder of the website https://gstportalindia.in for the help of GST Taxpayers of India. Having a perfect accounting experience of more than 10 years in a Private Ltd Company.