As the tax filing season approaches, we tend to search for ways to save a good amount of money. People often visit legal advisors and tax experts to know more about specific government policies and schemes that have been fabricated to help the citizens save on taxes. However, to keep the tax-saving process seamless, you need to know some measures yourself.

HUF, which stands for Hindu Undivided Family, can be your way to save taxes. As per specific rules and regulations, a Hindu family can form a HUF to get tax advantages. With the HUF, you can also be entitled to other advantages. Read on to know some important facts associated with this fantastic scheme and get additional tax benefits.

What is the Hindu Undivided Family (HUF)?

A Hindu Undivided Family (HUF) can be referred to as a family that comprises all the people related to a common ancestor, including the daughters and the male descendants’ wives. A HUF consists of the head of the family (Karta), generally referred to as the senior male member, and other family members who act as coparceners.

As per Section 2 (31) of the Income Tax Act, 1961, a HUF is counted as a single person and is, therefore, considered as a separate identity for tax evaluation purposes. Simply put, the Hindu families’ income in the country, which is still not divided, will be considered a joint income. The tax will be imposed on all the family members collectively, rather than imposed on a single person.

There are many rules and regulations that need to be followed by a HUF to avail of the tax concessions. Having an individual and separate PAN to file the members’ returns includes one such rule applied for the HUFs. 

How to Create a HUF?

Out of many other reasons, the main intention behind forming a HUF is to avail additional tax benefits. However, to do that, you need to comply with some rules and regulations, as mentioned below:

  • Only a family can form a HUF and not a single person.
  • Sikhs, Buddhists, Jains, and Hindus can only form HUF.
  • HUF is automatically created for a member who gets newly added to the family through matrimony.
  • HUF comprises one common ancestor and all his descendants, including their wives and daughters.
  • HUFs can often be associated with assets that have come to the family in the form of a gift, will, or ancestral property.
  • After the HUF has been created, a bank account should be opened in the HUF name.
  • Once the bank account has been opened, a PAN number is generated in the name of that HUF. 

Tax Implications Associated with HUF

Generally, the main reason behind creating a HUF is to avail of the benefit of an additional PAN card that is legally accepted and to avail of tax benefits. Once a HUF has been created, and you get the benefit of an extra PAN card, the members will not be subject to taxation individually anymore. The additional PAN card will be used to file returns of the entire HUF as a whole.

With the new PAN card allotted to the HUF, the family can start filing the income tax returns. If the annual family income of that HUF is more than the government’s prescribed limit, the family will be taxed at 10%, 20%, and 30% of the income tax slab.

Let us take an example so that you can comprehend the taxation rules associated with HUFs better.

Suppose, in a family, there are four members; husband, wife, and two children. The annual income of the husband is 25 lakhs, and that of the wife is 16 lakhs. They also earn an amount of Rs. 6 lakhs p.a by renting their ancestral property.

Keeping the individual annual income of the husband and the wife separate, the earnings from the ancestral property can be taxed on the wife or the husband or both of them. Go through the below-mentioned pointer to see how it works:

  • If the amount earned from rent is taxed on the husband, who falls under 30% income tax slab, he would have to pay a tax of 30% of the rent amount, i.e., Rs. 1.8 lakhs.
  • If it is taxed on the wife, who also falls under the 30% income tax slab, she will have to pay 30% of Rs. 6 lakhs, which equals Rs. 1.8 lakhs.
  • If the rent from the ancestral property is taxed equally on both the husband and the wife, both individuals will have to pay 30% of the rent amount, i.e., Rs. 6 lakhs. This case, therefore, would lead to the husband and wife individually paying Rs. 90,000 each. If taken collectively, the entire tax amount will be Rs. 90,000 + Rs. 90,000 = Rs. 1,80,000.
  • Now, when it comes to HUF, the members can enjoy additional benefits on the amount earned as rent from the ancestral land. For the members of the HUF, the taxes would be reduced to nearly an amount of Rs. 60,000 to Rs. 70,000 (depending on the deductions on income tax claimed by that HUF). This will help you save nearly Rs. 1,10,000 (Rs. 1,80,000 – Rs. 70,000) in the process.

Advantages and Disadvantages of Forming a HUF

There are certain benefits that HUF members are entitled to, other than enjoying additional tax benefits. Let’s check out some of the benefits of forming a HUF.

  • Just like all other citizens of the country, the HUF members are also liable to pay taxes. The HUF member will have to go for tax audit under the guidance of a registered CA as prescribed in Section 44AB of the Income Tax Act, provided the total turnover of that member’s business exceeds Rs. 25 lakhs or Rs. 1 crore.
  • The head of the HUF gets the right to sign all the necessary documents on behalf of the family members. Under his authorization, any senior member of the HUF can sign the relevant documents.
  • A woman can become a co-partner of the HUF if her husband is the head of the family. In this case, the additional income earned by the wife will not be added.
  • A child adopted by the HUF members at any point in time can also be entitled to the benefits associated with HUFs.
  • Availing loans becomes easier for the members of HUFs.
  • Except for Kerala, the HUF is recognized in all other Indian States.

Just like every good thing comes with some downsides, the same is true for HUFs. Let’s have a look at some of the disadvantages of forming a HUF:

  • With the HUF in action, every family member gets the same rights on every ancestral property or assets. It cannot be sold without the consent of all the family members. Moreover, the family members increase due to birth and marriage, which automatically increases the shareholders of that particular asset or property.
  • If the HUF decides to divide and form nuclear families, the HUF needs to be closed. As the family decides to separate, the question of assets getting divided comes into the scenario, which becomes quite challenging to manage. Besides, there are various legal hassles you need to deal with.
  • With the decrease in the number of joint families, the HUF is losing its importance as a tax-saving tool. Besides, there have been cases where HUF members have faced many difficulties in distributing properties.

Key Takeaway

Hindu Undivided Family (HUF) offers the members many other benefits, apart from helping them avail additional tax benefits. However, just like all other schemes, there are some demerits associated with these. 

Therefore, it is advised that a HUF keeps all the legal norms in mind before acting towards their assets and properties. Also, make sure you know the rules right before you plan to form a HUF.