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HUF is among the most efficient methods for tax savings in the legislation of Income Tax. Buddhist, Jain, and Sikh households are regarded as HUFs legally. An HUF is typically led by the Karta, the eldest member of the family, and includes other coparceners. A Hindu Undivided Family (HUF) is recognized as an individual entity under the Income Tax Act. It can own assets, generate revenue, and utilize deductions such as Section 80C, 80D, and capital gains exclusions, thereby aiding families in legally dividing income and reducing taxes.
*What constitutes a Hindu Undivided Family (‘HUF’)?*
HUF stands for Hindu Undivided Family. It is an independent legal entity established under the Income Tax Act, designed for taxation purposes. Buddhist, Sikh, and Jain households are likewise included within the scope of HUF. This is a legal tax-saving method accessible to joint families. An HUF can possess assets, generate earnings, and access tax advantages separately from its members, assisting families in minimizing their total tax burden by legally dividing income. The Karta is the head of the HUF, and the family members are known as coparceners.
*Who comprises the Hindu Undivided Family (‘HUF’) coparcener/members?*
The constituents of an HUF consist of a shared ancestor and all direct descendants, along with their spouses and unmarried daughters. At least two members from the same family can form an HUF (Hindu Undivided Family). The individuals consist of:
*Karta:* The primary member of the HUF, typically the oldest male or female, responsible for managing family matters and possessing unlimited liability.
*Coparceners:* Coparceners are basically all the male and female direct descendants from a common ancestor. This includes daughters who are born into the family. They all have the same rights when it comes to the property of a Hindu Undivided Family (HUF) and can ask to divide it up if they want.
*Other Members:* The spouses of coparceners are considered members of the HUF post-marriage but do not qualify as coparceners. They possess maintenance rights but lack the right to request partition.
It’s only other co-owners who can ask for a division of the Hindu Undivided Family’s property. Meanwhile, the Karta is responsible for all the family’s debts, even taxes
*Hindu Undivided Family (‘HUF’) Residential Status.*
Whether a Hindu Undivided Family (HUF) is considered a resident in India hinges on whether its affairs are managed from within India.
*Resident Hindu Undivided Family (‘HUF’).*
An HUF is considered to be living in India if its affairs are managed and controlled from within India during the preceding year. Even if the control is only partial, it’s still viewed as control originating from India. Basically, if the head of a Hindu Undivided Family (HUF), known as the Karta, is a resident and usually lives in India, then the HUF itself is also considered a resident and usually living there.
However, if the Karta is a resident but doesn’t usually live in India, then the HUF is also treated as a resident but not as someone who usually lives there.
*Non-resident Hindu Undivided Family (‘HUF’).*
If an HUF’s control and management are entirely outside India for the entire previous year, it is considered a Non-Resident HUF.
Basically, an HUF’s residency status is tied to its Karta’s residency when the HUF is managed or controlled from India. If that’s not the case, the HUF is always seen as a Non-Resident.
*Hindu Undivided Family (‘HUF’) Income Tax Slab.*
When it comes to HUF taxes, they are pretty much like individual taxes, with just a couple of minor differences. HUFs use the same tax brackets as individual taxpayers, whether they are following the old tax system or the new one. It does not matter if the HUF is a resident or not; the tax brackets are identical for both systems.
*Rebate for Hindu Undivided Family (‘HUF’).*
Lots of people think HUFs can get a rebate if their taxable income is under Rs. 7 lakh in the new tax system or Rs. 5 lakh in the old one. There’s also a Rs. 12 lakh limit in the new system for FY 2025-26. But that’s not actually the case. HUFs can’t claim rebates; only resident individuals can. That said, HUFs do have some tax advantages.
*Hindu Undivided Family (‘HUF’) Income Tax advantage.*
HUFs get the same income tax brackets as individuals. They have a basic exemption of Rs. 2.5 lakh in the old system and Rs. 4 lakh in the new system for FY 2025-26. Since HUFs are considered separate entities for tax purposes, their income tax brackets and deduction limits are distinct from those of their members. This means some income can be allocated to the HUF rather than to the members, which can lower the total tax owed.
Many people mistakenly think that a rebate can be claimed if a Hindu Undivided Family’s (HUF) taxable income is under Rs. 7 lakhs in the new tax regime or Rs. 5 lakhs in the old regime (with a potential Rs. 12 lakhs under the new regime for FY 2025-26). However, this is incorrect. HUFs are not eligible for rebates. Only resident individuals can claim them. Despite this, HUFs do have several tax benefits available, such as:
*Important tax advantages for HUFs include:*
Section 80C: Allows deductions of up to ₹1.5 lakh on investments like PPF, ELSS, and life insurance.
Section 80D: Provides deductions for health insurance premiums paid for HUF members.
Section 80G: Offers deductions on eligible donations made by the HUF.
Home Loan: Deductions are available on the interest paid for a housing loan.
Capital Gains: Exemptions under Sections 54, 54F, and 54EC can be claimed upon reinvesting long-term capital gains.
*How to Set Up a Hindu Undivided Family (‘HUF’)?*
*1. Create an HUF deed/affidavit.*
A legal deed should be drafted on stamp paper, outlining the HUF’s structure, the Karta, its members, coparceners, and any business activities.
*2. Apply for an HUF PAN Card.*
An application for an HUF PAN can be submitted online by filling out Form 49A.
*3. Open an HUF Bank Account.*
A bank account can be opened in the name of the HUF by providing the PAN, HUF deed, and necessary KYC documents.
“An HUF can be utilized for various purposes, including business operations, receiving gifts, acquiring property, and making investments.”
Hindu Undivided Family (‘HUF’) Registration Rule.
An HUF cannot be formed by a single person; it requires a family. An HUF can be established upon marriage and includes the husband, wife, and their children.
*Benefits of a Hindu Undivided Family (‘HUF’) registration.*
Forming an HUF offers several advantages, including:
• Separate PAN and potential tax savings
• Ability to split income
• Benefits for succession planning
*Drawbacks of a Hindu Undivided Family (‘HUF’) registration.*
However, there are also some disadvantages to consider with an HUF:
• Potential for disputes during partition
• Complexity in compliance procedures
• Limited scope of application
• An HUF is not permitted to receive a salary.
*Liquidation of Hindu Undivided Family (‘HUF’).*
You can break up a Hindu Undivided Family (HUF) by dividing its property among the family members who have inheritance rights. This division can happen in two ways:
1. Completely: All the HUF’s property is split up, and the HUF is no more.
2. Partially: Only some of the HUF’s assets are divided, and the HUF continues with what’s left.
To make sure the division is official, you need a written agreement, called a partition deed that is properly stamped and registered. Then, to wrap things up with the tax authorities, the HUF’s PAN card is turned in.
Author: Mr. Honey Jain
Founder of E-Tax World
