HUF can be used as an efficient tax saving tool that can be used to reduce taxes by proper Tax Planning. The notion of HUF Hindu undivided family) is particularly relevant In India since joint families exist in Indian culture where an individual’s income is also taxed as joint income. Income is charged on family as a whole as a unit. So, we can conclude that family is assessable as a unit and has to hold a separate PAN card for earning income and getting assessed under Income tax act, 1961.
So, let’s get into the comprehensive understanding of HUF and how it can be used as a legal tax planning tool:
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As per Hindu law, it is a family consisting of all persons lineally descended from a common ancestor, including wives and unmarried daughters.
HUF cannot be created under a contract but is automatically created in a joint Hindu family with common ancestors and linear descendant.
There are 3 conditions which need to be fulfilled to meet the HUF criteria:
There should be common ancestor and at least 2 coparceners to recognize HUF under Income tax Act.
The person responsible for managing the affairs of the family is called Karta. In most of the cases, the senior-most male member of the family is known as Karta or manager.
Any male or female person born in a joint family under Hindu law who is within four levels in lineal descendent from the common male ancestor is considered as a coparcener and anyone who becomes part of the family other than by the virtue of birth (I.e. by marriage) is treated as a member. However, a person who is adopted into the family also becomes its coparcener from adoption though not born in the family. As per the amended law since 2005, even a girl child becomes a coparcener by birth and can continue to be a co-parcener of her father’s HUF even after her marriage. However, she will only be a member of her husband’s HUF.
All the members of a family, including wife, children, their wives, and their children can be members of HUF. The male members are called coparceners while the female members of HUF are called members.
Co-parcener have a right to seek partition and become the Karta of the HUF. Whereas, Members have the right to be maintained out of the funds of HUF, and receive their share at the time of partition but do not have the right to seek for partition or become the Karta.
A HUF comes into existence automatically after the marriage of an Individual and birth of 1st child and only a HUF creation deed on a stamp paper is required to recognize it as HUF for the purposes of Income Tax Act 1961. Consequently, a separate PAN card should be obtained for the HUF and a separate bank account should be opened in the name of the HUF.
It is important here to note that capital infusion should be done taking into account the clubbing provisions under Section-64(2) of Income tax act,1961. This clubbing can be surpassed if the amount transfer in HUF account is invested by Karta in tax free scheme (E.g., tax free bonds). Income earned from tax free bonds being tax free shall not be income and clubbed in hands of transferor u/s 64(2) The tax-free income can then be re-invested to earn even taxable income. It is important to note that clubbing provision is attracted on income and shall be clubbed in hands of transferor but Income on income is out of Clubbing Provision and shall be taxable in hands of HUF and not transferor.
Since HUF is an artificial person it cannot earn income from salary.
For e.g. If there are 3 members in a family and the income of each family member’s income exceeds Rs 10 lacs. Further the family has a let out ancestral property from which it receives rental income amounting to Rs 10 lacs. Now ignoring any deductions if such income is taxed in hands of any family member it shall be taxed at 30%. However, if such income is shown in hands of HUF then there shall be exemption up to Rs 2.5 lacs I.e., savings of Rs 75,000. Then further for income ranging between 2.5-5 lacs tax rate shall be 5% instead of 30% (I.e., tax savings of 25% amounting to Rs 62,500) if the income would have been taxed in the hands of any family member.
Let’s understand with an example whatever we have read in the article:
Scenario 1 Interest income held in Mr. Piyush’s name
Particulars | Amount |
Salary | 20,00,000 |
Interest income | 10,00,000 |
Gross Total Income | 30,00,000 |
Deductions: u/s 80C | 1,50,000 (Maximum of Rs 1.5lacs) |
: u/s 80D | 20,000 |
Net taxable income | 28,30,000 |
Tax liability | 6,87,960 |
Scenario II Interest income Transferred in Mr. Piyush’s HUF name (Piyush sons and HUF)
Revised tax liability of Mr. Piyush
Particulars | Amount |
Salary | 20,00,000 |
Gross Total Income | 20,00,000 |
Deductions: u/s 80C | 1,50,000 (Maximum of Rs 1.5lacs) |
: u/s 80D | 20,000 |
Net taxable income | 18,30,000 |
Tax liability of Mr. Piyush | 3,75,960 |
Tax liability of Mr. Piyush’s HUF
Particulars | Amount |
Interest income | 10,00,000 |
Gross Total Income | 10,00,000 |
Deductions: u/s 80C | 1,50,000 (Maximum of Rs 1.5lacs) |
: u/s 80D | 0 |
Net taxable income | 8,50,000 |
Tax liability of HUF | 85,800 |
Tax saving under Scenario II of Rs.2,26,200.
Let’s take another example where Mr. Ram is a salaried employee and has an ancestral property which has been let out and he receives rent from that property amounting to Rs 7,50,000 and he forms HUF. He also pays LIC Premium of Rs 60,000/- for his family, PPF investment of Rs. 1,00,000/-. His company deducts PF of Rs. 1,50,000/- from his Salary.
So, let’s check his liability if this rental income is taxed in individual capacity and HUF.
Scenario I
Particulars | Amount |
Salary | 20,00,000 |
Rent from House property | 7,50,000 |
Less: Standard deduction u/s 24(a) | 2,25,000 |
Gross Total Income | 25,25,000 |
Deductions: u/s 80C | 1,50,000 (Maximum of Rs 1.5lacs) |
Net taxable income | 23,75,000 |
Tax liability of Mr. Ram | 5,46,000 |
Scenario II
Revised tax liability of Mr. Ram
Particulars | Amount |
Salary | 20,00,000 |
Gross Total Income | 20,00,000 |
Deductions: u/s 80C | 1,50,000 (Maximum of Rs 1.5lacs) |
Net taxable income | 18,50,000 |
Tax liability of Mr. Ram | 3,82,200 |
Tax liability of Mr. Ram’s HUF
Particulars | Amount |
Rent from House property | 7,50,000 |
Less: Standard deduction u/s 24(a) | 2,25,000 |
Gross Total Income | 5,25,000 |
Deductions: u/s 80C | 1,50,000 (Maximum of Rs 1.5lacs) |
Net taxable income | 3,75,000 |
Tax liability of HUF | 6,500 |
Tax saving under Scenario II of Rs1,57,300.
Conclusion: Formation of HUF is easy and also has tax benefits but it is not sunshine and rainbow everywhere, the dissolution of HUF is tricky and requires consent of all the members. However it should be noted that there is a disadvantage as well and that is the fact that all assets of in the name of the Hindu undivided family are assets of the family and not of a specific individual. So everything must be taken into consideration both the benefits and the drawbacks.
(For any queries, the author can be reached at supriya@guptapiyush.com)
Can Husband and wife create HUF ??
Isthat after 2020 the existing HUF creation Deed to be written afresh after Supreme Court judgement regarding equal share for married daughter
My father has HUF file and i also have HUF file. I am depositing in my daughter PPF for 80c benefit through HUF.
Can my father deposit in PPF of my son (i.e.My father’s grand son) for 80C benefit through his HUF?
Hi supriya
Your page was useful
Need more guidance on HUF
Excellent Article, Supriya. I have learnt quite a lot from your Article. Your Illustrations were very nice. Although a Sr.Member, I was not very clear about HUF. I got educated. In one place, you have mentioned that a Girl Child can be a Co-parcener in one family by birth. But Next sentence contradicts this, saying that only a Male Member can be a Co-parcener & a Female Member can only be a Member. Which is correct ?
Thank You for sharing the knowledge
HUF is NOT applicable in State of KERALA