HUF- a different attitude to Save Income Tax
HINDU UNDIVIDED FAMILY (HUF)
- 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.
Assessment of HUF :-
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.
Ancestral Property: Ancestral property may be defined as the property which a man inherits from any of his three immediate male ancestors, i.e. his father, grandfather and great grandfather. Therefore, property inherited from any other relation is not treated as ancestral property. Income from ancestral property held by following families is taxable as income of HUF:
- a) A family of widow mother and sons (may be minor or major) ;
- b) Family of husband and wife, having no child ;
- c) Family of two widows of deceased brothers ;
- d) Family of two or more brothers ;
- e) Family of uncle and nephew ;
- f) Family of mother, son and son’s wife ;
- g) Family of a male and his late brother’s wife.
Note
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.
Taxability of HUF
In order to compute the income of an HUF, one has to first ascertain its income under the different heads of income (ignoring incomes exempted under sections 10 to 13A of the Act). The following points should be keep in mind while computing income:
HUF
HUF means Hindu Undivided Family. You can save taxes by creating a family unit and pooling in assets to form an HUF. HUF is taxed separately from its members. A Hindu family can come together and form an HUF. Buddhists, Jains, and Sikhs can also form an HUF. HUF has its own PAN and files tax returns independent of its members.
An HUF is taxed separately from its members. Therefore, deductions (such as under Section 80) or exemptions allowed under the tax laws can be claimed by it separately. For example, if you and your spouse along with your 2 children decide to create an HUF, all the 4 of you as well as the HUF can claim a deduction for Section 80C. HUF is usually used by families as a means to build assets.
Let’s understand in detail.
How is HUF Taxed?
- HUF has its own PAN and files a separate tax return. A separate joint Hindu family business is created since it has an entity separate from its members.
- Deductions under Section 80 and other exemptions can be claimed by the HUF in its income tax return.
- HUF can take an insurance policy on the life of its members.
- HUF can pay salary to its members if they are contributing to its functioning and work of the joint Hindu family business. This salary expense can be deducted from the income of HUF.
- Investments can be made from HUF’s income. Any returns from these investments are taxable in the hands of the HUF.
- An HUF is taxed at the same rates as an individual.
- Every member of the family can deposit their income in the common corpus
- Single person’s authority while participation from entire family
- Tax benefits on deposits under various sections
- Corpus can be divided only on agreement of every coparcener of the family
- HUF will have a unique PAN card; this PAN card along with the PAN of Karta should be produced.
- A declaration form will be provided where every member has to make a signature stating the name of Karta and declare
- They are the only members of HUF.
- Karta to have sole authority over HUF account
- Every transaction on behalf of HUF account, made by each member of the family is governed by karta.
- Residential proof of Karta
- Identification proof of Karta
- Since the account is equivalent to an individual’s account there are various tax benefits and a few of them are mentioned below.
- According to IT act, tax rebates and deductions can be availed under sections 80C, 88 and 80L for HUF account.
- Gifts collected up to a worth of Rs 50,000 will be tax free. A father who owns a HUF account can gift a property or money of higher worth to a son who owns a smaller HUF account; but he should specify that the gift is for the son’s HUF and not to him as an individual. Under section 64(2) and 56(2) tax benefits can be enjoyed in such instance.
- Corpus can be used for investment in tax free money instruments.
- There can be a strong sense of insecurity among members that can keep the corpus of the account empty and as long as corpus is empty the account is non functional.
- If any of the members of HUF is willing to for a partition then the process of partition in deposit in HUF account can turn to be tedious (problematic).
