Hindu Undivided family is a kind of family account having a separate legal tax entity status. If used properly and lawfully, HUF can help in considerable tax saving. In the eyes of income tax law, individual files and family files are different and this family file is termed as Hindu undivided family. Tax saving has always been one of the major requirement of any investor, HUF account leads to creation of new tax file and thus one more option to spread your income. Let’s understand HUF in detail.
What is HUF?
As I said earlier that it is a family account and thus HUF comprises of immediate family members Husband, wife, Children (both Sons and daughters). It also includes Grandsons and Great Grandsons. HUF is an entity under Hindu law, so only Hindus, Jains, Sikhs and Buddhists are allowed to have HUF account. Hindu undivided family account can be used to receive gifts meant for family; Inheritances (Ancestral property) etc. and thus create a separate tax file with in the family. Whatever income HUF generates with its capital will be taxed in the hands of HUF as per the individual (non- senior citizen) tax slabs.
Terms associated with Hindu Undivided family
Karta: The head of the family (oldest male member) is the Karta of HUF. Karta will be responsible to manage the affairs of HUF. On his death his eldest son will take his place. Senior female member can become Karta in the absence of any male member. Please note that at least 2 members are required to continue with HUF.
Coparceners: These are the Lineal descendants of Karta. These are those members which acquires right in the HUF property by virtue of their birth. They have equal right over the property of HUF and can demand the partition of HUF. Coparceners include Karta, Son(s) and Daughter(s) of Karta, Grandson(s) of Karta , Great Grandson(s) of Karta.
Members: A female member of the family, generally the wife of Karta is the member of HUF. Member cannot demand her share or partition in the Hindu Undivided family.
Daughters will remain coparceners in their father’s HUF even after marriage. Simultaneously they can also acquire the right of member in their husband’s HUF.
Son(s) can open their own HUF after getting married. So they can also be part of 2 HUFs at a time.
How to create an HUF?
Hindu undivided family need not be created; it comes automatically in existence once a Hindu male gets married. There’s a very common misconception that to start HUF one needs to have children. But it’s not true, as soon as you get married, HUF automatically comes into being. Though to give it a legal tax entity status there are some formalities like applying for PAN card, Opening of Bank account, having a rectangular stamp in the name of HUF and creating of capital through gifts or inheritances. Writing an HUF deed is not compulsory, but banks may demand list of coparceners which include their PAN numbers and date of births.
How to infuse capital into an Hindu undivided family (HUF)?
There are a few restrictions on infusing of capital into HUF account. One also needs to be sure of Section 64(2) of Income tax act to avoid clubbing of income.
- No member or coparcener should gift anything to HUF; otherwise the income generated from that gift will be clubbed in the hands of donor. To avoid this Karta may invest the gift proceeds in the instrument which generates tax free income like equity. ( Pls note that in Budget 2013, Finance Minister has allowed Members and co parceners to gift to HUF with no clubbing applicable)
- No stranger can gift more than Rs 50000/- in your HUF account.
- HUF can receive gifts only from relatives of Karta. Relatives can be the immediate ascendant or descendant of Karta or Karta’s wife which may include father, father in law, Uncle , aunt, uncle in law, aunt in law etc. Gift deed should clearly mention that gift is being given to HUF and not Karta himself.
- You may also take gift from your father’s HUF.
- HUF can be used to receive inheritances or transferring any ancestral family property into.
How Hindu undivided family (HUF) account helps in saving taxes?
Earlier in the article on Tax planning Tips, I have clearly pointed out the 4 rules in tax planning to reduce your overall tax out go. I reiterate those here again.
A) Spreading the Family income among different family members
B) Taking full advantage of tax exemptions available.
C) Taking full advantage of tax deductions available.
D) Optimum use of tax exempted income.
By creating Hindu undivided family you have created one more tax file in your family. Now you can spread your income into one more tax entity which can use all the tax deductions which an individual can use. It can save Rs 1 lakh in section 80C, up to Rs 20000 in section 80D , Take advantage under section 80DD , standard deduction of rental income etc. But the point to note here is that HUF is not the relative of any family member, so whatever it receives by way of gift is 100% taxable in its hand. You must be thinking, so where lay the advantage?
You will see the advantage when you generate a considerable corpus in a HUF. If there was no HUF all the gift amounts will be a part of your personal corpus and you will be paying taxes on the income generated on this corpus. By transferring the amount in an HUF you have reduced your personal tax liability and have taken advantage of income tax slabs and tax deduction. Even if the gifts received by HUF is taxable, but due to the income tax slab and provision of section 80C and 80D investments, you can comfortably take gift of Rs 3.20 lakh in any financial year. If there’s any ancestral property which is generating rental income, this property can be transferred to Hindu undivided family account to spread the income. Inheritance received by way of WILL is not taxable (Read : Role of Will in estate planning), thus one should do his estate planning in such a way that rather than bequeathing the assets directly to children, one should look from the tax planning angle too and create different tax files like HUF, Trust etc. to reduce the future tax liability of children. (Read : Private Trust – Protect, mange, distribute)
Once the adequate corpus is generated, one may take a loan from HUF for house purchase or construction and take advantage of section 24 of interest payment. One may also take loan for business purpose and show the interest payment in business expenses etc.
One major drawback of HUF is that once the assets or money gets transferred to HUF, it becomes family property. All members will lose the direct control and now onwards assets will be managed by Karta only. Also the assets lying in HUF can’t be bequeathed through WILL. So, one need to be very cautious while creating an HUF.
It’s good from tax planning point of view but may not suit to some from practicality point of view.
What do you think about this article?
Do you find Hindu undivided family a good tool to save taxes? Do share your views of HUF and any practical issue you faced in Hindu undivided family account if any.