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HUF – All you Need to Know about Hindu Undivided Family

Last Update Date : April 16, 2018

Are you wondering whether you should create a HUF or not? Members of a HUF get several perks including tax benefits. However, it has some disadvantages too. This guide can help you understand the concept of HUF in a simple and detailed manner with pros and cons so that you can judge if forming a HUF is a good choice or not for you.

Hindu Undivided Family

What is an HUF?

The members of a Hindu family can come together and form a Hindu Undivided family. It forms automatically in a Hindu family without the requirement of a contract. One single person alone cannot form an HUF. Brahmo Samajist, Arya Samajist, Virashaiva, Lingayat, Prarthna Samajist, Jains, Sikhs, and Buddhist families can also form an HUF even though the Hindu Law does not govern them. It consists of a common ancestor and every one of his lineal male children together with their spouses and daughters. Daughters are considered a member of their father’s HUF until they get married. The HUF files return independently and is separate from its members. The assets of HUF are the ones which come as a gift, a will, an ancestral property, property acquired from the sale of joint family property or property contributed to the common pool by members of HUF.

Members of an HUF

All the members in a family are considered members of an HUF, wherein the male members are referred to as coparceners and the female members are referred to as members. The senior most male member in the family is normally referred to as Karta, who manages the affairs of the family.

Rights of the members of an HUF

The Karta of the family generally manages the family property, which is regarded as the joint property of all the coparceners. The coparceners can demand the partition of an HUF by way of distribution of HUF property among the coparceners. This partition cannot be demanded by the members of HUF, and they would be entitled to receive maintenance from the HUF.

How to Form an HUF?

An HUF is formed by a family. It is automatically formed when a person gets married and starts a family. After the HUF is formed it must be registered in its name. Below mentioned are the few important things required to form an HUF.

Documents Required to Form an HUF

  • HUF Deed – It should have a legal deed. It is a written legal formal document on a stamp paper which should contain the details of its Karta, coparceners and its business. Here a declaration is provided by the members wherein the name of the Karta is declared and that he would have the authority of the accounts and would hold the right to govern all the transactions of the HUF accounts on behalf of the members.
  • Obtain PAN in the name of HUF – In Form 49A, the application for HUF PAN card can be made which can be furnished online as well as manually.
  • A bank account in the name of HUF – This bank account should be used for making all investments/expenses of HUF. While opening the bank account, a rubber stamp of the HUF and all documents pertaining to the HUF should be properly stamped. As per the circular of RBI, round rubber stamps are not accepted now hence stamps used should be rectangular.

Documents to be Maintained by an HUF

Other than the HUF Deed, PAN Card and bank account in the name of HUF below paperwork is required to be kept by an HUF.

  • Demat account – Needs to be opened in the name of HUF
  • Proper documentation and books of accounts – It is required to be maintained to segregate investments of HUF and self
  • Karta to sign all the documents – Karta is required to sign all the documents on behalf of the HUF
  • Income Tax Return – HUF needs to file the income tax return separately

HUF Demat and Trading Account Checklist

All the documents collected for opening an individual’s Demat and trading account are collected from the Karta. The following documents are required:

  • Karta’s PAN card copy
  • Karta’s permanent address proof
  • Karta’s photograph
  • PAN card copy indicating the existence of the HUF client
  • Bank proof copy indicating the existence of the HUF client
  • Demat proof copy indicating the existence of the HUF client (in case of existing depository participants)
  • Karta’s declaration giving details of family members of the HUF (names, sex (male, female), DOB, signatures and relationship with Karta)
  • Financial document in the name of the HUF

HUF’s Tax Implications and When to File a Tax Return

HUF files tax returns independently and is separate from its members. After ascertaining its total income under the different heads of income (without giving effect to the provisions of section 10A, 10B and 10BA or Chapter VIA), if the income exceeds the exemption limit, the HUF has to file a return of income.

  • The HUF can separately claim the deductions or exemptions under the tax laws. E.g. deductions under section 80. The members of the family can split their income among themselves and HUF, and then claim deductions for themselves individually and for the HUF separately for section 80.
  • The HUF can also take an insurance policy on the life of its members.
  • When the members of the family are contributing or working for the Hindu family business, the HUF can pay salary to them and claim deductions in HUF income for the same.
  • Income earned as a result of investments made from the HUF income is taxable in the hands of the HUF.
  • The tax slab rates are the same for an HUF are same as they are for an individual.

Documents Required while Filing Income Tax Return

The taxpayers are not required to attach any document (like proof of investment, TDS certificates, etc.) along with the return of income as ITR forms are attachment less forms. However, in case of assessment or inquiry conducted by the tax department, the taxpayer should retain and produce these documents before the tax authorities.

However under section 10(23C)(v), 10(23C)(vi), 10(23C)(vi)(a), 10A, 10AA, 12A(1)(b), 44AB, 44DA, 50B, 80-IA, 80-IB, 80-IC, 80-ID, 80JJAA, 80LA, 92E, 115JB or 115VW, the taxpayer who is required to furnish a report of audit shall furnish it electronically on or before the date of filing the return of income.

[Read: ITRs to be filed by HUF]

Income Taxable as HUF Income

The income which is earned by using HUF funds or property only is taxable as HUF income. Income that arises on the investment of HUF funds (e.g. interest earned on loans given by a HUF) or on the utilisation of HUF assets (e.g. rent earned from let out HUF property) would be regarded as HUF income.

When the HUF contributes funds to the capital of a partnership firm, the profit and interest received from that firm by a partner who represents the HUF is considered as HUF income. This is because the income in this case has been raised by investment of the HUF’s funds.

Benefits of Forming an HUF

There are a number of advantages of forming an HUF:

  • The members can split the family’s income and file taxes separately. Individually as well as HUF tax return. This reduces the tax liability. Personal incomes of members are not required to be taken as the HUF income.
  • Different taxable units can be formed of HUF using the loopholes of will or gift. For tax purpose the assets or savings made or insurance premium disbursed by the HUF is deducted from the net income.
  • The family can settle on an arrangement regarding partition while saving on tax. e.g. if an HUF has 2 coparceners who are not earning and a Karta and they have two business units and a house. The partition can be done by giving each business unit to each of the coparceners. This will also bring down the tax liability and will not be impartial.
  • A woman is part of her husband’s HUF as well as her father’s. Even though a woman cannot start a separate account as the husband is the Karta, she can be the co-partner in the HUF. The additional income earned by the woman cannot be added to this.
  • The official reputation of an HUF remains the same even in the hands of women in the event of the death of Karta or the last male member in the family. Hence the ancestral or acquired assets of the HUF stays in the hands of the widows and need not mandatorily be partitioned.
  • There is no requirement for ancestral joint family assets for the HUF to exist.
  • Women in the family, can gift property in her name and can make a gift towards the HUF.
  • Getting loans is easier for the HUF’s members.

Drawbacks of Forming an HUF

Not everything is rosy about HUF, there are some disadvantages as well:

  • An HUF is formed automatically when one marries. However, for an HUF to be documented by income tax officials, money-spinning asset needs to be shown and which can only be in the form of a gift from close kin or via a will for every HUF member.
  • All the assets in the name of HUF are assets of the family and not of an individual member of the family.
  • Karta of an HUF cannot gift or transfer HUF property, but he can make certain gifts to the female members. Gift of immovable property within reasonable limits can also be made by a Karta to his wife, daughter, daughter-in-law or even to a son out of natural love and affection. Gift of immovable property within reasonable limits can be made only for the dutiful purpose, e.g. marriage of a daughter etc.
  • Partition of HUF land often leads to clashes and court cases. Because if a property is assigned to an HUF, every coparcener has an equal right to it. Hence cannot be transferred and can only be sold if all the members agree to it.
  • An HUF is not allowed to become an equal partner in any company. The Karta or an HUF member can represent the HUF in an enterprise. However, the income earned can be taxed as it falls under HUF income.
  • Resources for the finance of HUF can be brought in only through inheritance or gift (conditional on gift tax laws – an amount exceeding Rs 50,000 from non-family members is taxable).
  • If the HUF is formed only with the intention of saving on tax, it may not work in the long run. The technical problems increase with time. The income tax department might take actions against the HUF if they find out the same.
  • The assessment of income becomes a challenge when the members move to abroad for studies or job as the HUF is an Indian phenomenon and is not recognised in other countries.
  • HUF can only be broken if all the concerned parties agree to it.
  • Women cannot combine her separate assets with the property of the joint family.

Frequently Asked Questions

Can a woman become HUF Karta?

Yes, a woman can become HUF Karta. The Delhi High Court ruled in favour of a female being the Karta of an HUF. However, the same has not been implemented in the Income Tax Act.

Are there any states in which the HUF is not recognised and which are they if any?

Yes. In Kerala, HUF is not recognised. It was abolished by The Joint Family System (Abolition) Act, 1975, by the Kerala State Legislature.

What is the minimum number of coparceners required to form an HUF?

There should be minimum 2 coparceners in a family for that entity to be taxed as an HUF.

Can a woman become a coparcener?

Yes. As on 9th September 2005, the Indian Succession Act has been amended by few states like Maharashtra, and Tamil Nadu wherein the daughters are to be regarded as coparceners who were unmarried as on the date of the amendment. However, this right is not given to women in most parts of the country.

If a father has passed away before the amendment made on 9th September 2005 giving equal rights to daughters and sons, will his daughter be able to claim a share in his property?

No, the daughter will not be able to claim a share in her father’s property as both must be alive on the date of the amendment.

Basically, there aren’t many complicated formalities required for an HUF. It is automatically formed, is simple and if its benefits are utilised smartly, it can help one save taxes to a great extent.

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