What is HUF in income tax?

Standing for Hindu Undivided Family, HUF can be utilised as an effective tax-saving instrument to lower taxes via careful tax planning. Given that joint families are common in Indian culture and that an individual’s income is taxed as joint income, the concept of a HUF is particularly pertinent here.

When it comes to HUF, income is assessed against the family as a whole. So, it follows that a family is liable for assessment as a unit under the Income Tax Act of 1961 and must possess a separate PAN card. Now that you know what is HUF in income tax, let’s look at how it may be utilised legally for tax planning.

See also: Coparcener meaning in HUF and legal context explained

What is a Hindu Undivided Family (HUF)?

According to Hindu law, a family includes all members who are directly derived from one another, including wives and unmarried daughters. HUF is automatically founded in a joint Hindu family with shared ancestors and a lineal descendant, not by the terms of a contract. To meet the HUF criteria, three requirements must be satisfied:

• Hinduism is required. Despite not being subject to Hindu Law, Jain, Buddhist, and Sikh households are nevertheless classified as HUFs under the Act. There needs to be a partnership.
• A joint family estate should be established, consisting of the transferred property as well as property inherited from ancestors.
• For HUF to be recognised under the Income Tax Act, there must be a common ancestor and at least two coparceners.

Who is Karta, a HUF member?

Karta refers to the person in charge of running the family’s affairs. Most often, the oldest male family member is referred to as Karta or manager. According to Hindu law, a coparcener is any man or female who is born into a joint family and is within four levels of the common male ancestor’s lineage. Anyone who joins the family by means other than birth, such as marriage, is also recognised as a member.

According to the legislation, as it has been revised since 2005, a female child can continue to be a coparcener of her father’s HUF even after she marries. She will, however, only be a part of her husband’s HUF. A family can include any number of people, including the wife, kids, kids’ wives, and kids’ kids. While the female members of HUF are referred to as members, the male members are referred to as coparceners. Coparceners have the power to request division and take over the role of the HUF’s Karta. While Members have the right to be maintained from HUF money and get their share when the company is divided, they are not permitted to request a division or become Karta.

How does a HUF develop?

After a person marries and gives birth to their first child, a HUF immediately exists. The Income Tax Act of 1961 simply requires a HUF creation deed on stamp paper to recognise a HUF as such. As a result, a distinct PAN card should be issued for the HUF, and a distinct bank account should be created in its name.

How can a corpus for HUF be created?

• Assets that were given to HUF (relatives or non-relatives). A gift from a non-relative cannot be worth more than Rs 50,000.
• Possessions left to HUF in a will.
• Assets accumulated via the division of a bigger HUF in which the coparcener had membership (for example, a HUF in which the coparcener’s father or grandfather served as the Karta).
• Typically, inherited properties are assets obtained through the sale of shared family assets.

Tax advantages received by HUF

For the purposes of assessment under the Act, a HUF is treated as a separate entity and is free from tax on income up to Rs 2.5 lakh as well as taxed at individual slab rates.

For instance, let’s assume that a household has three members and the combined income of all three surpasses Rs 10 lakh. The family also receives a rental income of Rs 10 lacs from an ancestral property that is rented out. Now, disregarding deductions, if such income is taxable in the hands of any family member, it will be taxed at a rate of 30%.

However, there would be an exemption up to Rs 2.5 lakh, or Rs 75,000 in savings, if such income is demonstrated to be in the hands of a HUF. Further, if the income had been taxed in the hands of any family member, the tax rate for income between 2.5 and 5 lakh would have been 5% rather than 30% (i.e., a tax savings of 25% equaling Rs 62,500).

1. A HUF may declare the gross yearly worth of its own property as NIL, just like an individual. According to Section 24(b) of the Income Tax Act of 1961, the HUF is also qualified to claim an annual interest deduction of Rs. 2 lakh on self-occupied residential property. The HUF may also rent out its assets to anyone, and it may take full use of the unlimited interest-on-loan-paid deduction in relation to such assets.
2. According to the Income Tax Act of 1961, a HUF that is assessed as a distinct person is eligible for separate deductions under Section 80C of up to Rs. 1.5 lakh, Mediclaim for family members under Section-80D of up to Rs. 25,000, and up to Rs 50,000 in the event that any member is a senior citizen, Rs 10,000 under Section 80TTA, and Rs 50,000 for senior citizens. Since two PAN cards may be sought and a person may file two income tax returns, one in his own/personal capacity and the other in the name of the HUF, these deductions may be claimed regardless of the individual deductions of the members.
3. A HUF may apply for capital gain exemptions under Sections 54 and 54F, 54B, and 54EC of the Income Tax Act of 1961 in the same manner as an individual.
4. HUF may also claim deductions for the cost of providing dependent or disabled family members with medical care, as well as deductions under section 80G for charitable contributions. HUF can invest in mutual funds and benefit from a 15% tax rate on short-term capital gains (STT Paid) if they have a separate DEMAT account.
5. HUF can carry on business but not a profession, but it must have HUF finances to be able to pay Karta and other family members a salary.

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