Hindu Undivided Family (‘HUF’) is treated as a ‘person’ under section 2(31) of the Income-tax Act, 1961 (herein after referred to as ‘the Act’). HUF is a separate entity for the purpose of assessment under the Act. Under Hindu Law, an HUF is a family which consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. An HUF cannot be created under a contract, it is created automatically in a Hindu Family. Jain and Sikh families even though are not governed by the Hindu Law, but they are treated as HUF under the Act.
In this article, I am covering some important points related to HUF, its taxability and its assessments alongwith format of HUF creation deed.
Key points in creation of HUF and format of deed for creation of HUF
1. Under the Income Tax Act, an HUF is a separate entity for the purpose of income tax return.
2. The same tax slabs are applicable to HUF as to individual assessee.
3. You can not transfer your own assets/money into HUF.
4. If you have ancestral property and earning some income from this property, then it is better to transfer this asset to HUF and save tax up to exemption limit applicable to individual.
5. You can transfer the money received on sale of ancestral property /assets into your HUF.
6. The income from property of HUF can be further invested in instruments such as shares, mutual funds, etc. and will be assessed under HUF.
7. Existence of property or multiple members is not a pre-requisite to create HUF. A family which does not own any property may still have the character of Hindu joint family. This jointness is understood in terms of faith and food. This is because as a Hindu is born as a member of the joint family.
8. Any gifts received by the members of HUF (birthday, marriage, etc.) can be treated as assets of HUF.
9. The HUF is taxable as separate person under income tax hence one can save tax from basic exemption of Rs. 2.5 lakh. HUF will also gain from the tax slab structure of computing income tax.
10. Apart from basic exemption of Rs. 2.50 lakh, section 80C deduction up to Rs. 1.50 lakh is also available.
11. For example, if you are in 30% tax bracket, then approx tax saving by creating an HUF will be as follows:
- Basic exemption up to Rs. 2,50,000 = nil
- Rs. 2,50,000-5,00,000 @5% = Rs. 25,000
- Rs. 5,00,000-10,00,000 @20% = Rs. 1,00,000
- 80C deductions Rs. 1,50,000
- Therefore total tax payable for HUF on income of Rs. 6,50,000 is only Rs. 12,500.
- If this income of Rs. 6,50,000 is taxed in individual hand @ 30% tax due is Rs. 1,95,000.
- Hence, you can save a total of Rs. 1,82,500 by creating an HUF and transferring ancestral property income and other income under HUF.
Note: An HUF is liable to pay Alternate Minimum Tax if the tax payable is less than 18.5 per cent (including cess and surcharge) of “Adjusted Total Income” subject to prescribed conditions.
12. The following incomes are not taxed as income of HUF:-
- If a member has converted or transferred without adequate considerationhis self-acquired property into join family property, income from such property is not taxable in hands of the family.
- Income of impartible estate (though it belongs to family) is taxable in the hands of holder of estate and not in hands of HUF.
- Personal income of the members cannot be treated as income of HUF.
- “Stridhan” is absolute property of a woman, hence income arising therefrom is not taxable as income of HUF.
- Income from individual property of daughter is not taxable in hands of HUF even if such property is vested into HUF by daughter.
13. An HUF is recognized as a separate assessable entity under the Act. Its income may be assessed if following two conditions are satisfied:
- There should be a coparcenership. In this connection, it is worthwhile to mention that once a joint family income is assessed as that of HUF, it continues to be assessed as such in subsequent assessment years till partition is claimed by coparceners.
- There should be a joint family property which consists of ancestral property, property acquired with the aid of ancestral property and property transferred by its members.
Please note that Property obtained by daughter from joint family property would be her absolute property. Any income therefrom is chargeable to tax in her hands in the individual status only. This will also apply to any legal heir obtaining property in the capacity of a descendent.
FORMAT OF HUF CREATION DEEDS
FORMAT-I
DECLARATION
I, ____________________________ son Of ___________________________________ Residing at ____________________________________________ aged ___Adult do hereby declare-
- That I am Karta of ____________________________________________
- That I received on behalf of the H U F gift of Rs. ___________ by way of CASH/CHEAUE from my FATHER ________________________________(name of relative of karta of HUF) on dt. _______________ this formed the corpus of the HUF.
- That the HUF at present is consisting of the followings members-
I) Shri _____________________, Adult, Residing at _________________
II) Smt. _____________________, Adult, Residing at _________________
III) Kumari _________________-Minor, Residing at ___________________
- That the above statements are true to the best of my knowledge & belief. Declare this on _________________
WITNESS: Signature
- —————————- ————————————
- —————————- ———————————–
FORMAT- II
[To be executed on Rs. 200 Stamp Paper in Maharashtra]
DECLARATION OF GIFT MADE BY ________________________
TO THE HINDU UNDIVIDED FAMILY OF ___________________
I, _____________________________, residing at _______________________ ____________________________________________________________, do hereby declare and affirm as under:
1. That out of natural love and affection borne by me towards the Hindu Undivided Family of ______________________________, I have made a gift of Rs.______ (Rupees _________________ only) as per the following details:
By Cheque No.________, dated __________, drawn on Bank ____________________, ________________ Branch, in favour of ________________________ HUF.
2. The above Gift has been duly accepted by ________________________, as Karta of his Hindu Undivided Family and has been duly acknowledged hereunder.
3. This Declaration of Gift is made to record the fact that I have made this Gift in favour of the Donee as above, who now has the absolute right, title and interest in the gifted amount.
Date: _____, 200 _____
(Signature of the Donor)
ACKNOWLEDGEMENT OF GIFT
I, ________________________, hereby acknowledge having received the above gift made to my Hindu Undivided Family by _________________________.
Date: ___________, 200__ ___________________
(Signature of the Donee
as Karta of his HUF)
(Republished with Amendments)
Also Read- Creation of HUF – Tax Planning Advantage
Author Bio
We are 4 legal heirs, can we Create HUF with 2 coparceners, is it require all members declaration.