Understanding HUF
HUF – ‘Hindu Undivided Family’ is a unit comprising of the members of the family that is formed in a family following Hinduism, Sikhism, Buddhism, Jainism only. HUF is a separate entity having its own assets and liabilities and is considered as a separate accessee while filing income tax and thus provide opportunity to save additional taxes.
Composition of HUF
HUF is family unit comprising of COPARCENERS and MEMBERS. All persons born in the family are coparceners. All other members that became a part of the family through marriage etc. are members of the HUF. The eldest of the Coparceners is the KARTA and is responsible for the activities of the HUF.
Example: Consider a family of 8. Spouses with 1 son and 1 daughter. Both offsprings are married and each has one child. Now let’s see the composition of HUF in this family:
- Total family members: 8
- KARTA of the HUF: 1 (the eldest member, Husband in this case)
- COPARCENERS of the HUF: 4 (Born in the family – Husband, Son, Daughter, Grandchild through son)(Karta is also a copercener)
- MEMBERS of HUF: 4 (Not born in the family – Wife, Daughter in law, Son in law, Grandchild through daughter)
Steps to create HUF
- Deed of agreement (On a stamp paper and notarized. Serves as a document proof to complete other steps.)
- Get a PAN for the HUF
- Open a bank account of the HUF.
How HUF acquire assets?
- Transfer of ancestral property of the family into HUF. Once transfered to HUF the rights to the property will be with all coparceners.
- Transfers from individuals to HUF
- Gift from others
- Purchase of assets by HUF
Income heads allowed in HUF
Except your income from salary, you can show all your income heads in HUF. Income from house property, profit and gains from business and profession, income from capital gains.
How does HUF help in saving tax?
Let’s go through this very basic example considering only the deduction of 1,50,000 allowed under section 80c (old tax regime) for an individual earning 30 lacs in a year vis-a-vis when the same income is distributed between individual and the HUF.
Individual income 30,00,000
Deduction (80c) 1,50,000. Taxable income 28,50,000. Total tax 6,67,500 (Considering the current income tax slab FY 2023-24)
Now, when the income is distributed into individual 20,00,000 + HUF 10,00,000
Deduction (80c) 1,50,000 each for both assessee, Taxable income individual 18,50,000 & HUF 8,50,000, Tax for individual 3,67,500 & HUF 82,500. Total tax 4,50,000.
TOTAL TAX SAVED: 2,17,500
Note: If you want to get tax benefit as per IT act, you need minimum 2 COPARCENERS in a HUF.
More points to know
- Karta of the HUF manages the HUF and is responsible for all the decisions of the HUF.
- Similarly, only Karta has unlimited liabilities. If the HUF have liabilities, it is the responsibility of the Karta alone to pay off the liabilities.
- Eldest copercener whether a male orange female can bethe Karta of the HUF.
- Only the coparceners, including the Karta, are the owners of the assets of the HUF and not the members.
- Total 4 generations can be part of an HUF
- You can form and HUF with minimum 1 coparcener and 1 normal member.
