Hindu Undivided Family | HUF Full form, Meaning and Tax Benefits

What is Hindu Undivided Family (HUF)?

Under Section 2(31) of the Income-Tax, 1961, a Hindu Undivided Family is recognised as a separate entity separate from the family members it consists of. Hindu Undivided Family consists of members who are descendants of the same ancestors, including wives of the male members of the family and their unmarried daughters. HUF is not created under any law, but it is recognised under the act. HUF is automatically created under Hindu culture. Jains and Sikhs are not governed by Hindu law but are recognised as HUF under the Income-Tax Act, of 1961. When any joint family is considered a HUF under the Act, they will continuously be treated as the HUF until any partition between the members of the family takes place. There should be a joint family consisting of any ancestral property.

What is Ancestral Property?

An ancestral property is a property that is passed on from the upper generation to the lower generation due to the will or death of an upper-generation member. Ancestral Property is generally any property that a male member inherits from his father, his grandfather, and his great-grandfather.

Tax implications of forming a Hindu Undivided Family

HUF is taxed separately from its members. Along with Hindus, Jains, Sikhs, and Buddhists can also form HUF by creating a family unit and pooling their assets together. HUF has a separate PAN number and files tax returns separately from its members. HUF and its members, both can claim deductions under section 80C.

How is HUF taxed?

• As HUF is taxed separately from its members and is treated as a separate entity, it can claim deductions under section 80C, the same as an individual.
• HUF has a separate PAN number and files tax returns separately.
• HUF is taxed the same as an individual.
• Investments can be made from the end of HUF.
• HUF can provide salaries to its members if they are working towards the functioning of the HUF. This salary will be treated as an expense from the end of HUF and will be deducted from its income in case of accounting treatment.
• HUF can take insurance policies for its members.

Example:

Suppose Mr. Sushil decides to form a HUF with his wife and three children after the death of his father Mr. Lakshman. As Mr. Sushil was a single child, the property was transferred to him only from his father. The property held by the late Mr. Lakshman earns an annual rent of ₹15 lacs. Mr. Sushil has an income from his salary of ₹40 lacs. Is the creation of an HUF save tax?

Income from Various Sources	Mr. Sushil’s Income before forming HUF	Mr. Sushil’s Income after forming HUF	Income of HUF
Income from Salary	40,00,000	40,00,000	–
House property rent	15,00,000	–	15,00,000
Standard deduction of house property rent*	(4,50,000)	–	(4,50,000)
Income from House Property	11,50,000	–	11,50,000
Total Taxable Income	51,50,000	40,00,000	11,50,000
Under Section 80C *Section 80C allows a maximum of Rs. 1,50,000 deduction from net taxable income.	(1,50,000)	(1,50,000)	(1,50,000)
Net Taxable income	50,00,000	38,50,000	10,00,000
Tax payable	₹12,37,500 (Working Note 1)	₹8,92,000 (Working Note 1)	₹75,000 (Working Note 1)

**As per section 24A of the Income Tax Act, a taxpayer is entitled to a 30% standard deduction from the rental income to cover expenses like repairs and maintenance.

Working Note 1: Tax in this example is calculated under the New Tax Regime.

Annual Income	Tax on Mr. Sushil’s Income before forming HUF	Tax on Mr. Sushil’s Income after forming HUF	Income of HUF
Up to ₹2,50,000	nil	nil	nil
₹2,50,001-₹5,00,000	₹12,500	₹12,500	₹12,500
₹5,00,001-₹7,50,000	₹25,000	₹25,000	₹25,000
₹7,50,001-₹10,00,000	₹37,500	₹37,500	₹37,500
₹10,00,001-₹12,50,000	₹50,000	₹50,000	–
₹12,50,001-₹15,00,000	₹62,500	₹62,500	–
>₹15,00,001	30% on 35,00,000 = ₹10,50,000	30% on 23,50,000 = ₹7,05,000	–
Total Tax Payable	₹12,37,500	₹8,92,500	₹75,000

Circumstances	Tax Payable under different circumstances
Tax on Mr. Sushil’s Income before forming HUF	₹12,37,500
Total Tax on Mr. Sushil’s Income after forming HUF & that of HUF	₹8,92,500 + ₹75,000 = ₹9,67,500
Tax saving due to formation of HUF	₹2,70,000

How to form a Hindu Undivided Family?

Certain conditions need to be followed to form a HUF, some of the conditions include:

• There must be a family to form HUF, a single person can not form HUF.
• An HUF is automatically created under the Hindu culture and is recognised under the Income Tax Act.
• HUF must consist of a common ancestor and their descendants along with the wives of male members and their unmarried daughters.
• Along with Hindus, Jains, Sikhs, and Buddhists can also form HUF by creating a family unit and pooling their assets together.
• When any joint family is considered a HUF under the Act, they will continuously be treated as the HUF until any partition between the members of the family takes place.
• There should be a joint family consisting of any ancestral property.

Disadvantages of Forming a Hindu Undivided Family

1. Limited Scope: HUFs are primarily recognised under the Hindu Law and certain provisions of the Income Tax Act in India. This means that only Hindu, Sikh, Jain, or Buddhist families can form HUFs. Other communities or religions do not have these options.

2. Complexity: Maintaining a HUF can be administratively complex. Separate financial records, tax returns, and accounting may be required, adding to the administrative burden.

3. Taxation Issues: While HUFs offer some tax benefits, they also come with complex tax regulations. Members must adhere to specific tax regulations, and improper management can lead to penalties from tax authorities.

4. Limited Assets Pool: Assets within a HUF are typically limited to ancestral or joint family property. This can restrict the ability to include personal assets acquired after the formation of HUF.

5. Succession Issues: HUFs follow strict rules for the inheritance and succession of property, which may not align with the preferences of the family members. This can lead to disputes over the distribution of assets.