Hindu Undivided Family

Hindu Undivided Family :

An HUF is a separate entity that can be created by members of a family, wherein the members are lineal ascendants or descendants. Hindus, Buddhists, Jains and Sikhs can open HUFs.

The Concept:

The concept of HUF says that apart from individuals there is another separate entity called “Family” which can also have its own assets and liabilities and even regular source of income, which should be taxed separately.

How an HUF is created:

There is no formal procedure of creating an HUF. The relation of a Hindu undivided family does not arise from contract but is the creation of law. It arises from status; it is simply created by marriage as per the Hindu laws, or by succession from the fathers’ HUF.  A ‘Karta’ manages the affairs of an HUF.

In order to have an HUF registered and recognized by the Tax Authority:

• The HUF needs to have an income-generating asset, which can only come as a gift from a relative or through a Will for all the members of the HUF. Generally during the formation of an HUF one of the relatives deposits some money as a gift to start the HUF account.
• Once it has such an asset, the HUF needs to be registered in a particular name.
• HUF gets a separate Permanent Account Number (PAN) & can open a separate bank account

HUF as a tax paying entity:

An HUF is a completely separate entity from its members. This is the reason why many families create an HUF. Since an HUF gets a separate PAN and is taxed separately; like an individual an HUF has tax slabs and can get tax deductions and rebates under the Income Tax Act.

Ways in which HUF can be used for Tax Planning:

• An HUF can be a Resident or Non Resident of India depending on where the Karta is residing
• An HUF can buy residential or commercial property in its name
• It is also possible to jointly purchase a home in the name of the HUF and any member of the HUF.

Tax benefits to HUF buying a property:

Tax deduction laws for an individual and an HUF with respect to self-occupied property is the same

• HUF can claim deduction of Home Loan interest (under section 24) upto Rs. 2,00,000
• HUF can get tax benefit under section 80C for Home Loan principal re-payment within the overall limit of Rs. 1,50,000
• In case of joint ownership between a member of HUF and HUF and repayment being from both accounts, both are individually entitled to deduction on account of interest on housing loan up to Rs 2,00,000

Tax benefit of Rental Income from an HUF property: Non- clubbing of income

Lets say there are 3 members in a family

• Husband’s Salary: 15 lacs
• Wife’s Salary: 12 Lacs
• 1 Child without Salary
• Additionally, one ancestral property which fetches them an annual rental income of 6 Lacs p.a

Now the Question is – in whose hand should this Rental Income of Rs. 6 Lakhs p.a. be taxed? In real life, the most sought after solution is to anyone who has no income or less income so that the tax liability is the least.

Savings (year on year):   Rs 92000

Please Note: For the sake of simplicity, Taxes have been computed taking into account the “Deductions available under Section 80C” only and “Education Cess applicable on the Tax Payable”