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HUF for Tax Planning

In this post I will be covering indepth analysis of HUF and how to use HUF for Tax Planning. Stay with through the end of this long article and all your questions would be answered. If you just want to see the steps for HUF Creation the skip to bottom and see the 4 Simple Steps for HUF Creation.

WHAT IS AN HUF?

Hindu Undivided Family, commonly known as HUF, is a little known tool for tax planning. If you are a Hindu or a Sikh or a Jain or a Buddhist, you can form an HUF and hence avail the tax benefits.

An HUF can be formed by a family only i.e., a minimum of 2 people, not by an individual. It may consist of minor members. The Head of HUF is called as Karta, whereas the other members are called as Co-parceners.

HOW CAN IT SAVE TAX FOR YOU?

An HUF is considered as a separate legal entity and its income is taxed separately from its members. It is given the similar tax exemptions as given to an Indian resident – with the same slab rate taxation and deductions under Sections 80C/80D. It has its own PAN and files its own tax returns – independently of its members.

Let us understand the concept of HUF better through an example:

Mr. A decides to start an HUF with his wife and son as members. He inherited a property from his father through his Will, which earns an annual rent of ₹9 lakh. Mr. A has a salary income of ₹25 lakh. By forming an HUF, Mr. A can save tax in 2 ways:

  • The annual rent of ₹9 lakh which was earlier a part of Mr. A’s income, will now be shown as the HUF’s income. Thus, the net taxable income of Mr. A would come down.
  • HUF would have to pay a much smaller amount of income tax, after availing the applicable deductions.

Let us look at the table to understand the tax implications better:

HUF Tax Planning | CA India | Income Tax Returns | ITR Filing | Tax Planning India


By creating an HUF, Mr. A saves tax of ₹1,96,560 (i.e., ₹7,34,760 - ₹5,38,200). For HUF, there will be no taxability as the income here doesn’t exceed ₹5,00,000. (As from FY 19-20, income up to ₹5,00,000/- net of deductions (80C, 80D, etc.) will get full rebate under section 87A.)

Therefore, the entire income earned by the HUF is tax-free in the hands of HUF.

Deductions under Section 80C/80D

An HUF can invest its income proceeds in insurance policies, ELSS and tax saving Fixed Deposits and thus can claim deductions under sections 80C/80D through the following.

  • HUF can take insurance on life of Karta Only. Proposals on the Life of Co-parceners or members will be allowed only if Karta is uninsurable. (80C)
  • Investments to PPF (Public Provident Fund) by an HUF are not allowed. However, if the HUF contributes to the PPF Account of its members, the same can be claimed as tax deduction. This tool is majorly helpful when payments are made for Minor Members of HUF. (80C)
  • The other forms of investments would be Tax Saver Fixed Deposits/Term Deposits (FDs/TDs) and Equity Linked Savings Schemes (ELSS). (80C)
  • HUF can make payments for Mediclaim polices of their members subject to a maximum deduction of Rs. 25,000 /- only. (80D)

Note: 80C/80D deductions are not available under the new tax regime. However, the basic exemption limit is higher in that case. 

DIS-ADVANTAGES OF FORMING AN HUF

  • All the members have equal rights to the assets of the HUF. Therefore, in order to sell a property held under a common name, the approval of all the members is required.
  • Dissolution of an HUF can be undertaken only if all the members have given their consent for such dissolution.
  • On dissolution of an HUF, assets are handed over to the members and the income from such assets will be taxed as the individual income of the Member.

BUILDING A CORPUS

You can’t just transfer your personal money/assets to the HUF. Any transfer of personal assets of the members to the HUF would attract clubbing of income provisions. i.e. income from these assets will be treated as income of the individual transferring the assets, hence defeating the purpose.

Following are some of the ways in which the corpus may be formed:

  • Assets such as ancestral property received by the HUF through a will
  • Assets gifted by non-members (Gifts exceeding ₹50,000/- a year are taxable for the HUF. However, the basic exemption limit comes to the rescue allowing up to ₹5 Lakh annually without tax)
  • Funds/Assets received at the time of marriage
  • Income earned through Business/Profession that is the name of HUF
  • Capital Gains
  • Funds from the dissolution of a larger HUF
  • Other sources, except salary

Other Frequently Asked Questions (FAQs)

1) What is the meaning of Hindu Undivided Family?

The expression “Hindu Undivided Family” has not defined under the Income Tax Act or in any other statute. Hindu Undivided Family (“HUF”) which is same as joint Hindu family is a body consisting of persons lineally descendant from a common ancestor, including their wives and unmarried daughters, who are staying together jointly; joint in food, estate and worship. The daughter, on her marriage, ceases to be a member of her father’s HUF and becomes a member of her husband’s HUF. You can do better tax planning with HUF.

Essentials of the HUF : The essentials of the Hindu Undivided Families are:

  • One should be Hindu, Jains, Sikhs and Buddhists are considered as Hindus but not Muslims or Christians;
  • There should be a family i.e. group of persons – more than one; and
  • 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 includes 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 coparcenar like a son.

Points to be noted for HUF:

  • Karta – A Karta is the person who manages the affairs of the family. It is not necessarily required that the senior most member should be the Karta of an HUF. Any other male member of the family can be the Karta with the consent of the other members of the family.
  • Coparceners – The person who acquires by birth the interest in the family property. The coparcener enjoys the right to enforce partition.
  • The HUF continues to exist in the hands of the female members after the death of the male member.
  • Adopted child can become the member but he cannot become the coparcener.
  • The daughter after her marriage ceases to be a member of her father’s HUF. After marriage she becomes the member of her husband’s HUF.
  • A widow cannot be the Karta of the HUF as she is not the coparcener.
  • HUF is a separate entity for income tax purposes under the provisions of Section 2(31) of the Income Tax Act.

 

2) What is a Hindu Coparcenary? In what ways is it different from a HUF?

A Hindu Coparcenary is a much narrower body within Hindu Undivided Family.Generally speaking, it is a body of individuals who acquires interest by birth in the joint family property. They are the son, grandson and great grandson of the holder of the joint property for the time being. The coparcenary, therefore, consists of a common male ancestor and his lineal descendants in the male line within 4 degrees, running from and including such ancestor. No coparcenary can commence without a common male ancestor though, after his death, it may consist of collaterals such as brothers, uncles, nephews etc. The essence of coparcenary is community of interest and unity of possession. You should also see the taxation of HUF, to better know the taxation of HUF.

 

3) What is the difference between a co-parcener and a member?

A HUF, as such, can consist of a very large number of members including female members as well as distant blood relatives in the male line. However, out of this, coparceners are only those males who are within 4 degrees in lineal descendent from the common male ancestor. The relevance of concept of coparcenary is that only coparceners can ask for partition. The other male family members; i.e, other than coparceners in a HUF, have no direct claim over HUF property, but can claim only through the coparceners.

 

What are the advantages of HUF under Tax Laws?

The Income-tax Act, 1961 as well as Wealth-tax Act, 1957 recognise HUF as an independent assessable or taxable entity. This is done by specifically including “Hindu Undivided Family” in the definition of “person”, in section 2(31) of the Income-tax Act. As such, the income earned by such HUF will enjoy all exemptions and deductions; including the basic exemption from income-tax, so far as applicable.The Income Tax Act and Wealth Tax Act recognize the HUF as an independent assessable or taxable entity.HUFs enjoy all deductions and exemptions under the Income Tax Act independent of the income and tax liabilities of its members.

 

How a HUF can be created? Who can be members of a HUF?

HUF is a creature of law. It cannot be “created” by act of parties, except in rare cases of adoption and reunion. Birth of a son in a Hindu joint family automatically makes him a member of the HUF. In view of this, all male members automatically become members of the HUF. In addition to that, if a child is adopted, then he also becomes a member of the HUF. Similarly, in case of reunion of erstwhile HUF family members, such reunited members become members of the reunited HUF. Moreover, upon marriage, wife becomes a member of her husband’s joint family.

Schools of law under HUF – Two schools of law are there in order to create a HUF:

  • (1) Dayabhaga – It is prevalent in West Bengal and Assam. As per this school of law, the son acquires the right in the family property only after the death of his father.
  • (2) Mitaakshara – It is prevalent in rest of India under which, the son acquires the right in the family property right from his birth.

 

Which are the states in which HUF is not recognized?

Kerala is the State in which the HUF is not recognized. This is done by Kerala Joint Family System (Abolition) Act, 1975 with effect from 01.12.1976.

 

Is a HUF necessarily resident in India?

No. Section 6 of the Income-tax Act, 1961 clearly contemplates a situation where a HUF can be non-resident also. In fact, HUF can also be Not Ordinarily Resident. A HUF will be considered to be resident in India unless, during the previous year, the control and management of its affairs is situated wholly outside India. In such a case, it will be treated as non-resident HUF. Moreover, in case of a HUF whose manager has not been resident in India in nine out of ten previous years preceding the previous year or has, during the seven previous years preceding that year, been in India for a total 729 days or less, such HUF is to be regarded as Not Ordinarily Resident within the meaning of the Income-tax Act, 1961. As such, it is not necessary for a HUF to be resident in India.

What are the Tax System & Implication under HUF?

Taxation of HUF

Individual resident below 60 years of age (i.e. born on or after 1st April 1953) or any NRI / HUF / AOP / BOI / AJP *

Income SlabsIncome Tax Rate
i. Where the total income does not exceed Rs.2,00,000/-NIL
ii. Where the total income exceeds Rs.2,00,000/- but does not exceed Rs.5,00,000/-.10% of amount by which the total income exceeds Rs. 2,00,000/-
iii. Where the total income exceeds Rs. 5,00,000/- but does not exceed Rs. 10,00,000/-Rs. 30,000/- + 20% of the amount by which the total income exceedsRs. 5,00,000/-
iv. Where the total income exceeds Rs.10,00,000/-.Rs. 130,000/- + 30% of the amount by which the total income exceeds Rs. 10,00,000/-.

Surcharge: Nil

Education Cess: 3% of the Income Tax

An HUF is having all the properties in India. The Karta of the HUF is residing outside India permanently and the female members are staying in India and are managing the affairs of the HUF. What would be the status of such HUF?

The test is not where the Karta resides; the test is where the control and management of the affairs of HUF is situated. Even if a part of control and management is situated in India, such HUF will be treated as resident in India. Though, generally, Karta is supposed to manage the affairs of HUF, it is not an absolute rule and, by consent, the power of control and management may be delegated to other members of the family, either fully or partially.

As such, in this case, the status of HUF would be resident in India.Since HUF is deemed to bea distinct entity, it is widely prevalent to transfer certain sources of income in the hands of HUF and small HUFs of the sons, in a legal manner, thereby more assesses are created to divide the tax burden. Besides, an HUF may be used as tax planning device in a number of other ways, like partitions, re-unions of the partitioned families, family settlements/arrangements, renunciations, releases by the existing HUFs, payment of salaries to KARTA/members of the family, etc.

HUF funds may be invested in any source of income such as shares, securities, share in partnership Through KARTA, house property, etc. Deductions from gross total income of HUF are available as in case of an individual, generally.

 

How can be Tax planning through HUF?

Tax planning through HUF -

  • Increase the number of assessable units through the device of partition of the HUF.
  • Create separate taxable units of HUF through will in favour of HUF or gift to HUF.
  • Enter into family settlement / arrangement.
  • Payment of remuneration to the Karta and also to other members.

Other Tax Planning –

  • Transfer of individual property to the family.
  • Family reunion after partition.
  • Inheritance by succession
  • Providing loans to the members of the HUF.
  • Gift to members.

Legal aspects and partition of HUF –

  • Assets distribution in the course of partition would not attract any capital gains tax.
  • No gift tax liability.
  • No clubbing of incomes u/s. 64.

Surcharge: Nil

Education Cess: 3% of the Income Tax

 

4 Simple Steps for HUF Creation!

Creating HUF is the best way to save taxes by an assessee. Forming an HUF does not involve huge legal or procedural formalities to be followed. Formation of HUF is no more a cumbersome process for any individual. Forming HUF can help you save taxes to an extent.

Step 1 - Select a suitable name, Capital

For an HUF to be created the major requirements is the capital and persons. Capital can be in the form of ancestral property, assets gifted by relatives and friends, or received by the HUF through a will. The HUF to be created should have proper name. The members can choose a suitable name before starting a HUF business form...

Step 2 - Form a Deed

Formation of HUF should be embodied in a deed which provides that a proper legal deed or agreement is required before creating a HUF. The agreement should be between the Karta &other family members. The agreement need not always be in writing. The agreement/ deed should have all the details, including the name of Karta, co-parceners, address & source of funds in the corpus.

Step 3 - Apply for PAN

After executing the deed, the Karta is required to obtain a permanent account number PAN for the HUF. Obtaining PAN is a mandatory requirement as all financial transactions shall carry PAN.The minimum no. of members required is two who can be a husband and wife. Both the spouse can create a family and constitute a HUF...

Step 4 - Open a Bank Account

After that, the Karta is required to open a Bank a/c in the name of the HUF. The HUF is now ready to function. The Karta will have to invest in tax saving instruments and file tax returns on behalf of the HUF. Only the money related to the business of HUF shall be invested in such Bank accounts...

CONCLUSION

Everything has two sides to it, always select the one which seems more apt and beneficial than the other. As highlighted, there are more positives to form an HUF than rather not to, it is always preferable to create an HUF. Plan Well, Optimise Wealth.

NEED HELP?

We would be happy to serve in case you need help with the formation of your HUF. Also contact us if you want to discuss if HUF can be used for cryptocurrency and how to use HUF in your cryptocurrency trading or cryptocurrency arbitrage.

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