All About HUF

Meaning;  

What is an HUF? As the name suggests, an HUF is a family of Hindus. However, even Buddhists, Jains and Sikhs are regarded as Hindus, and can, therefore, set up HUFs. The concept of an HUF has basically evolved from ancient Hindu law. There are two schools of law governing HUFs in India-Mitakshara and Dayabhaga-and there are quite a few differences in the rights and obligations of HUF members in each of these schools. However, since the Dayabhaga school is largely confined to Bengal, we shall, in this article, only consider the provisions of the Mitakshara school, which are applicable to the rest of India

As Per Income tax

The expression “Hindu Undivided Family” has not defined under the Income Tax Act  or in any other statute.  When we dissect – essentials are (1) One should be Hindu, Jains, Sikhs and Buddhists are considered as Hindus  but not Muslims or Christians; (ii) There should be a family i.e group of persons – more than one and (iii) They should be undivided i.e living jointly and having commonness amongst  them.  All these three essentials are  cumulative.  It is a body consisting of persons lineally descended from a common ancestor and  include their wives and unmarried daughters, who  are living together, joint in food, estate and, worship (not now  necessary).  The daughter, on her marriage, ceases to be a member of her father’s HUF and becomes a member of her husband’s HUF. However, after  1-9-2005, daughter married or unmarried, is a co-parcener like a son.

Conditions required in corporation of HUF

There are some essential conditions that must be fulfilled to qualify as an HUF. These are outlined below:

1. To form an HUF all you have to do is to get Married. The HUF is created the moment you get married

2. Only one member or co-parcener cannot form an HUF;

3. The joint family continues even in the hands of females after the death of the sole male member;

4. An HUF need not consist of two male members. One male member is enough. For example, a father and his unmarried daughters may form and HUF.

Who can be members?

 All the members in your family, including your wife, children, their wives and their children. While the male members are called coparceners, the females are referred to as members. The senior-most male member is called the karta (manager), and a typical HUF consists of a karta, his sons, grandsons, and great-grandsons (all of whom are coparceners), and their wives and unmarried daughters (all of whom are members).
 
Now the question is how to Create an HUF:

1. To create an HUF you need to create a PAN card.

2. Open a HUF Bank account,

3. Prepare an HUF Creation Deed by transferring ancestor Assets, gift to the HUF as a capital

How to create capital In HUF: 

1.             Gifts from Relatives of the Members of HUF As per Section 56(ii) of the Income Tax Act, gifts received from the relatives of the members of HUF are fully exempted from the levy of tax. As gifts received from relatives of the members of HUF is fully exempted from tax, receiving gifts from Relatives is one of the most popular and effective ways of creating capital of the

2.             2. Gifts received at the time of marriage Gifts received at the time of marriage of any member of the HUF are fully exempted from the levy of Income Tax. However, gifts received at the time of marriage of daughter are not exempted and are taxable.

3.             Ancestral property Your ancestral property is not only your own and belongs to the whole family i.e. the HUF. The Ancestral property can be transferred to the HUF to create capital of the HUF.

4.             Aggregate Value of Gifts is less than Rs. 50,000 If the aggregate value of gifts received from any person during a financial year does not exceed Rs. 50,000, then this whole amount is exempted from levy of any tax. There is no limit on gifts received from family members and this limit of Rs. 50,000 is only for gifts received from non-relatives.

5.             Gifts received from members of the HUF If a gift is received from members of the HUF, then the income generated from these funds would get clubbed and taxed in the hands of the member making the gift. However, if this income is invested in tax-free instruments, the members making the gift will not have to bear extra tax burden as the income is already tax free

Advantages of HUF in Income Tax Act

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 assesses.

 3. 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.

 4. You can transfer the money received on sale of ancestral property /assets into your HUF.

 5. The income from property of HUF can be further invested in instruments such as shares, mutual funds, etc. and will be assessed under HUF.

 6. Any gifts received by the members of HUF (birthday, marriage, etc.) can be treated as assets of HUF.

 7. The HUF is taxable as separate person under income tax hence one can save tax from basic exemption of Rs. 2.5lakh. HUF will also gain from the tax slab structure of computing income tax.

8. Apart from basic exemption of Rs. 2.5  lakh & claim under section 80C deduction up to Rs.1.5   lakh is also available.

Apart from above, below are additional non-exhaustive techniques of reducing tax liability through HUF..
 
1.       Rental Income from a  property – Rental income from a property could be received on behalf of a HUF instead of an individual account.
 
2.       Business Income – Profits  generated out of the family business, in the name of a HUF, shall be taxed accordingly and exemptions will give more leverage on tax saving.
 
3.        The remuneration to Karta and members – Remuneration to Karta and other family members is an allowable deduction from income of an HUF.
 
4.       Loan to HUF members – If the business, capital or investment of the HUF is expanding, then such expansion can be done in the individual names of the members of HUF by giving loans to the members from the HUF. The HUF may or may not charge interest on the loans given.
 
5.       Family Settlement or Arrangement – The sole purpose of the family settlement should be to settle existing or future disputes regarding property, amongst the members of the family. Since this arrangement does not involve transfer, it would not attract gift tax, capital gains tax or clubbing. In a family arrangement, tax incidence is considerably reduced or it may even become nil.
 
Hence, setting up of an HUF can definitely help reduce tax liability, however, HUF transactions should be carefully thought through and planned properly so as to face the precision of income-tax scrutiny given the fact that tax authorities are skeptic towards HUF returns.

(The author can be reached at ca.manan1989@gmail.com or on +91 9873465846 for any queries)