written by | March 21, 2022

How does Hindu Undivided Family Act (HUFA) Allows You to Save Tax

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The full-form of HUF is Hindu Undivided Family. Incorporating a family structure and pooling resources together to form a HUF can result in tax benefits for the participants. When you form a Hindu undivided family, you can include every one of your family members to avail the tax benefits of the HUF act. In this post, we are going to be discussing in detail about how does Hindu undivided family act (HUFA) allows you to save tax, what is HUF and more.

Did you know?

For tax purposes, HUF is considered a separate section of the society and therefore, it is taxed separately. A HUF is governed by the Hindu law board.

What is HUF?

As we’ve mentioned earlier, the HUF, in its entiretyis subject to a different tax regime than the individuals who make up its membership. A HUF is formed when Hindu families come together in order to form a federation. Buddhists, Jains, and Sikhs are among those who can also establish a HUF in addition to Hindus. 

The HUF has its own tax identification number and is responsible for completing a tax return on its behalf without the assistance of its partners.

Benefits of Forming a Hindu Undivided Family in Terms of Tax Savings

A HUF is a separate entity with both private and business owners and can be taxed in the hands of income tax authorities. There are many advantages you can avail in forming a HUF - 

  • A HUF can start a business and receive profits from it.
  • A HUF is a legal entity that can possess a corpus, cash or another capital asset. 
  • Any personal funds transferred to the HUF will trigger clubbing provisions, meaning that the income from the HUF is treated as individual income. And therefore, it is taxable.
  • When you or your family as a whole separate from a Hindu Undivided Family, you won’t get a larger portion of the assets you owned as a HUF. Instead, the opponent party will get more assets.
  • The tax implications of forming a HUF vary between every state.

The HUF is taxed separately from its members, which can cause tax complications. However, the HUF can claim Section 80 deductions on its HUF income, and the individuals can claim these deductions separately. 

Also Read: Capital Gains Tax India– Definition, Types, Exemptions & Tax Saving

Possibilities to Save Money in the Long Term by Becoming a Member of A HUF

Being taxed separately from its members, the HUF can claim any deduction such as those granted under Section 80 or exemptions permitted under HUF account's tax regulations.  Lets understand this with a clear example. If you and your spouse, together with your two children, decide to join a HUF, then both of you and the HUF is eligible to claim a Section 80C deduction on your federal income tax return. Families frequently use HUF as a means of availing a larger amount of tax benefits. Let's go over this in greater detail.

What Kind of Taxation does the HUF Come Under?

The HUF has its tax identification number and produces a separate tax return from the rest of the society. Considering that it exists as a separate legal entity from its members, a joint Hindu family business can be founded in this way:

  • Tax deductions under Section 80 of the Income Tax Act and other exemptions may be claimed by the HUF in its filing of annual income tax return.
  • The HUF has the option of acquiring a life insurance policy for the members of the organisation.
  • The HUF can pay its members if they make significant contributions to the organisation's operation. Fortunately, this payroll expense can be deducted from the HUF's gross revenue for tax purposes.
  • A HUF, in contrast to an individual, is subject to the very same tax rates as an individual taxpayer.

Let us consider the following scenario to understand better on how a HUF is taxed. Mr Mahesh Sharma, upon the death of his father, decides to form a HUF with the participation of his spouse, sons, and daughters as participants. Since Mr Sharma was his parent's only child, the assets he received were transferred to the Hindu Universal Family or to a religious organisation (HUF). Approximately ₹7.5 lakhs in rental revenue are generated by the property held by Mr Sharma, father of Mahesh Sharma, who passed away in 2007. Mahesh Sharma receives an additional 20 lakh in addition to his salary. This was possible due to the fact that his father owned many other businesses and the money earned is as a result of that. As seen in the chart below, Forming a HUF may enable Mr Sharma to save money on taxes.

Profits from a variety of angles

Earnings of Mr Chopra previous to the formation of the HUF

Mr Chopra's income has grown since the formation of the HUF.

Earnings in HUF

Salary/wages  

Twenty Lakh

Twenty Lakh

---

Home-property rental

Seven lakh and Fifty Thousand only.

---

Seven lakh and Fifty Thousand only.

Home-property/standardised deductions

Two lakh and Twenty Five Thousand only.

---

Two lakh and Twenty Five Thousand only.

Home-property Income

Five Lakh and Twenty five Thousand only

---

Five Lakh and Twenty five Thousand only

Taxable income (total)

Twenty-Five Lakh and Twenty Five Thousand only 

Twenty Lakh only 

Five Lakh and Twenty Five Thousand Only.

Section 80 ©

One lakh and Fifty Thousand Only

One lakh and Fifty Thousand Only

One lakh and Fifty Thousand Only

Taxable Income (net)

Twenty Three Lakh and Seventy Five Thousand Only

Eighteen Lakh and Fifty Thousand Only

Three Lakh and Seventy Five Thousand Only.

Payable Taxes 

Five Lakh Fifty-Three Thousand Six Hundred and Twenty Five Only.

Three Lakh Ninety One Thousand and Four Hundred Only.

Seven Thousand Seven Hundred and Twenty Five Only.

Total taxes (as paid by Mr Sharma and Hindu Undivided Family)

Three Lakh Ninety Nine Thousand And One Twenty Five Only.

Savings of Taxes due to HUF 

One Lakh Fifty Four Thousand Only.

The tax strategy allowed Mahesh Sharma to save ₹1,54,500 in taxes, which he used to fund his business. Section 80C of the Income Tax Act allows both the HUF and Mr Mahesh (and other members of the HUF) to claim a deduction for the amount spent on his business project. 

The HUF's revenue may also be used to make investments, which will continue to be subject to taxation as long as he is in the HUF.

What Is the Procedure For Establishing a HUF?

  • A single individual cannot constitute HUF; instead, it can only be established by a group of family members and individuals.
  • In terms of marriage, a HUF is formed for the couple immediately.
  • The HUF generally consists of a common ancestor and their lineal descendants, including their spouses and unmarried daughters.
  • HUFs can be founded by Hindus, Buddhists, Jains and Sikhs.
  • In addition to assets that have been given to them as gifts, bequeathed to them, or inherited from them, HUFs frequently own property acquired through the sale of joint family property and assets donated to a shared pool by members of the organisation.
  • It is necessary to register a HUF as a legal entity in its own right once the government has approved its formation.
  • A HUF should have a legal deed in place before it starts its operation. 
  • Both information about the HUF's members and information about its business must be included in the deed. 
  • For the HUF to function appropriately, a PAN number must be obtained and a bank account in its name should be created.

Also Read: How To Save Income Tax on Income From Salary For Individuals

Drawbacks of Forming a HUF

Although a HUF appears to be the most beneficial solution for a family to save money on taxes, it does have certain drawbacks.

  • Members have equal rights to the property: The primary disadvantage of forming a HUF is that its members have the same rights to the property owned by the HUF. It is not possible to sell the common property unless and until all members agree to do so in a written agreement. Any new family members, whether by birth or marriage, are automatically accepted as members of the HUF and are entitled to the same rights and advantages as existing members. A HUF can balloon to unmanageably large proportions in terms of its size.
  • Partition: One of the most terrible aspects of beginning a HUF is the prospect of having to close it down. The only way to dissolve a HUF is through the process of dividing the common property equally among its members. To dissolve the HUF, all of its members must agree on the terms of dissolution before the process can begin. An asset allocation process known as a partition is a legal procedure in which assets are distributed among family members, resulting in numerous conflicts and a significant deal of legal aggravation.
  • The shared family setup is getting increasingly outdated: The HUF is a separate taxable entity from the rest of the family, so the Income Tax Department has recognised it as such. When nuclear families are the norm in today's society, the HUF is getting increasingly out of touch with reality. Several instances have come to light in which couples or families are fighting it out over shared household expenditures. Still, they neglect to explore the possibility of pooling their financial resources. Due to the rising number of divorces, the HUF is becoming less and less essential as a tax shelter.
  • HUF will be evaluated indefinitely till the time of partition: If a HUF is established, you will be expected to continue to file its tax returns until the HUF is disbanded, unless an exception applies. If you want your claim for a division to be considered, you must submit it in writing to the assessing officer. The assessment officer who receives a written copy of this nature is required to investigate the claim after alerting the claim to all the HUF members.
  1. Profits from the divided property are taxed according to the individual income of each member who receives them. 
  2. It is important to note that if the member, their spouse and any children join a new HUF, all income from the property transferred from an earlier HUF is taxed in the hands of the new HUF rather than the previous HUF.

Conclusion

In the case of a HUF, all family members should be registered as a single legal entity to avoid confusion. This must be done carefully since the HUF tax burden will be lowered to a greater degree. Sections 80C and 80CCF of the Internal Revenue Code allow you to get tax exemption on your investments, if you are a member of a functional HUF. Individuals who do not have any assets, on the other hand, are not eligible for this extra deduction. As a result, if you have a large family, you might consider forming a HUF.

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FAQs

Q: Can HUF members and the HUF separately claim Section 80C deductions?

Ans:

The HUF is eligible for an 80C deduction as a separate taxable unit. Both the members and the HUF cannot get 80C deduction separately.

Q: Is it required for a HUF to be based in India?

Ans:

A HUF is not required to be based in India. The HUF is regarded as a non-resident if its control and administration are outside India. A non-resident HUF manages its affairs outside of India.

Q: Is there a required minimum number of coparceners needed for HUF taxation?

Ans:

The HUF meaning in income tax is when two people form a HUF, one of them is a coparcener. To be taxed as a HUF, an entity must have two coparceners.

Q: Do women have HUF Karta?

Ans:

Absolutely! A woman could not be the HUF Karta until January 2016. However, the Delhi High Court declared in a landmark decision that a female could be the HUF Karta. This judgement and the appropriate amendment related to it is not officially incorporated into the HUF Act.

Q: Who is a HUF's Karta?

Ans:

The Karta, the most senior and experienced member of a HUF, is its leader.

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The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.