‘HUF as a tax vehicle is an effective tool and if possible you should take it.’

Introduction:

Hindu undivided family (herein called as HUF), is treated an a distinct taxable person as per the Income Tax Act,1961 and assessed separately under the act. As per the Hindu law, an HUF is joint family or undivided family consisting of its family members. If you are a Hindu, a Sikh, a Buddhist or a Jain than you can avail the benefit of these provisions and if possible you should take it.

Formation & Procedure:

A HUF is not created by a contract, it is deemed to come into existence at the time of the marriage, hence one person cannot form HUF. However to be legally recognised, an HUF has to be registered by an legal deed containing the details of the members and the business activities of the HUF. It has to obtain its own PAN card and open the bank account in its own name. 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.

Hindu Undivided Family

Taxation:

An HUF is taxed on slab rate basis applicable to the Individual assesses. A HUF is assessed and taxed separately from its members, therefore deductions under chapter VIA (such as Sec 80C) are available while calculating its taxable Income. HUF can also take insurance and Mediclaim policy of its members and avail the tax benefits.

Tax Savings:

Formation of an HUF can save taxes very effectively, Let us understand how it works with an example of a nuclear family. Mr. A having annual salary amounting to Rs. 30.00 Lakhs is married to Mrs. B having the same amount of salary. Mr. A has inherited a property from his ancestors which generates rent of Rs. 6.00 Lakhs. We shall explore following options :

a. If Mr. A family doesn’t form HUF and clubs the income in its own hand

b. If Mr. A family forms HUF

Particulars  Option A  Option B
 Mr .A  Mr. A HUF
Salary       30,00,000       30,00,000                 –
Rental Income         6,00,000                   –       6,00,000
Standard Deduction         1,80,000                   –       1,80,000
Gross Taxable Income       34,20,000       30,00,000       4,20,000
Section 80C Deduction         1,50,000         1,50,000       1,50,000
Net Taxable Income       32,70,000       28,50,000       2,70,000
Tax Payable         7,93,500         6,67,500
Tax Savings 1,26,000

Drawbacks:

While HUF as a tax vehicle is very effective, there are drawbacks of forming the same. Few of them have been discussed below:

  • When an asset is transferred to HUF it remains with it till closure, the only way an HUF can be closed down is through Partition. The effects of Partition have been discussed in below Paragraph.
  • All the members in an HUF have equal rights of the property.
  • Capital infusion for business expansion could be a hinderance as no outside members other than family can be introduced to the HUF.
  • HUF doesn’t have limited liability like Company or LLP, the Karta has the burden of unlimited liability.
  • After partition, the amount paid out by HUF to its members will be assessed as Income in the hands of the Members.

Effects of Partition:

Partition means division of the property and assets of the HUF. 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 members of HUF. Partial Partition is not recognised by the Income Tax Act,1961 i.e. it will continued to be assessed as if no such partition has taken place. However where an HUF undergoes a total partition, the entire property is divided to all the members and it ceases to exist as HUF.

Conclusion:

The HUF as a form of running business is losing relevance due to the joint families losing its significance along with the other drawbacks discussed above however it still remains an effective tool to save your taxes.

Any thoughts or queries, get in touch with us at Email: prateek@balajidarak.com

Author Bio

Qualification: CA in Practice
Company: M/s. Balaji Darak & Associates
Location: Gulbarga, Karnataka, IN
Member Since: 04 Aug 2020 | Total Posts: 1
Chartered Accountant with Bachelor's degree in Commerce having rich experience in Statutory Audit, Internal Audit, Group Reporting, Tax Audits of listed and multi-national companies along with private companies in manufacturing sector and hospitality business View Full Profile

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3 Comments

  1. C.P.Ethirajan says:

    Please let us know under what section asset allotted to a co-parcener in the partition will be brought to tax as stated by you as the last point in the drawbacks of HUF

  2. om prakash khemka says:

    VERY USEFUL ARTICLE .PLEASE ALSO TELL HOW HUF CAN BE DISSOLVED AND IF THE TWO OUT OF 4 MEMBERS HAVE BECOME NRI AND IF THREE WANT TO LEAVE THEIR RIGHTS IN FAVOR OF ONE NRI .THERE IS NO PROPERTY ONLY CASH JEWELLERY AND SHARES GRATEFUL FOR YOUR PROMPT RESPONSE THANKS

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