Under the Income Tax Act, 1961, Hindu Undivided Family (HUF) is an entity, which has been given certain exemptions, quite similar to an individual. If you are a Hindu or a Sikh or a Buddhist or a Jain, you can take benefit of these provisions, and if possible you should take it.
The HUF includes those persons who, by birth, acquire an interest in some joint family property. It also includes all lineal descendants of these persons, and their wives, and children, both sons and daughters.
Even married daughters can remain a part of the HUF, while being a member of her spouse’s family HUF.
Income tax benefits
A HUF is eligible for those exemptions that are available to a resident Indian who is not a senior citizen. It can own property and also have its own business. Let us take an example of a nuclear family. Naresh is married to Priya and have two minor children, Jaya (daughter) and Bhargava (son). Naresh’s annual income is Rs 10,00,000 and Priya’s Rs 10,00,000. Naresh has inherited an ancestral property, an apartment, which is on rent (annually Rs 3,00,000).
If Naresh forms an HUF, with him the Karta (head of the HUF), his children will be called coparceners and his wife will be a member. The first benefit for Naresh is that the rental income of Rs 3,00,000 which was hitherto assessed as part of his income will now be carved out and shown as HUF income, and the HUF will be assessed separately as another entity and will have the benefit of tax exemptions similar to those received by Naresh.
This will lead to reduction of income tax being paid by Naresh and the HUF will pay a much smaller amount of income tax on this income of Rs 3,00,000 after enjoying the exemptions available. Also, the gifts received by the coparceners/ member (beyond the exemption limit) can be shown as received by the HUF, thereby reducing the income tax burden of both Naresh and Priya.
You can invest the HUF income in life insurance policies, PPF accounts, ELSS in the name of Karta, coparceners or member of the HUF and it will get income tax deductions under Section 80C.
How to form a HUF
Open a bank account in the name of HUF titled ‘Naresh HUF’ with a rubber stamp, ID proof, residence proof and proof of the members of HUF family. The rubber stamp should be rectangular carrying the name of HUF and that of Karta. Then apply for PAN. Transfer the rent income from ancestral property along with excess gift amount received by HUF members (Karta, coparceners and members).
Disadvantages of HUF
Remember, whenever an asset is transferred to HUF it remains with it. Only when the coparceners will demand a partition of HUF, the property can be shared by the coparceners. HUF property cannot be mentioned in the Will. In case of Naresh HUF, the ancestral property transferred to HUF will remain part of HUF and Naresh later cannot transfer to his wife or son or daughter. After his death, his son will become the Karta, but other members will enjoy the benefits and income of the HUF.
HUF will be a good option for persons who have sufficient income and savings and who also have some ancestral property too (which could be treated as family assets for HUF). Before forming a HUF one should calculate the tax benefits clearly and then take a calculated decision.