Question 1: What is a Hindu Undivided Family (HUF) in India?
Answer: HUF stands for Hindu Undivided Family (HUF) in India. There are seven types of families determined for taxation under the Income Tax Act, and HUF is one of them.
- Individual
- HUF
- Company
- Firm
- AOPs/BOIs
- Local Authority
- Artificial Judicial Person
Hindu Undivided Family (HUF) in India is considered a separate legal entity formed by members of the same family, having their own PAN and bank account.
In earlier times, families used to own and manage property and assets as a unit, not individually. The idea of HUF was introduced to legally recognize and protect this joint ownership. Now, with time, the whole concept of joint families has started to fade away, but HUFs still exist. Nowadays, they are mostly used as a tax instrument.
Question 2: Who can form a Hindu Undivided Family (HUF) in India?
Answer: If you are married and have a family, then you can form a Hindu Undivided Family (HUF) in India. It is also called a Hindu Undivided Family, but it is not limited to Hindus; even Jains, Sikhs, and Buddhists can form a HUF under Indian law. Technically, a HUF comes into existence after marriage. To register it legally, you will need a PAN card in the name of the HUF to initiate the formation of the HUF, and finally, a bank account for the HUF.
Question 3: What is the difference between the Karta, co-parceners, and members of a Hindu Undivided Family (HUF) in India?
Answer: In a Hindu Undivided Family (HUF) in India, there are three types of persons:
- Karta: The Karta is usually the eldest male family member, responsible for managing and making decisions for the HUF.
- Co-parcener: Co-parceners are the members who are born into the family and automatically have a right to the HUF property and assets. Co-parceners can also demand their share and even ask for partition of the HUF if they wish to.
- Member: Members are also part of the HUF, but unlike Co-parceners, members cannot demand partition or claim a specific share in the assets.
Let us understand this with an example.
When Mr. Gupta, who is the senior-most member of his family, decides to form a HUF, his wife and children automatically become a part of it. Later, his grandchildren and great-grandchildren will also join the same HUF. Now, Mr. Gupta’s HUF includes three types of members. In short, in Mr. Gupta’s HUF, he will be the Karta, his son and daughter will be co-partners, and his wife, Mrs. Gupta, will be a member. When Mr. Gupta’s children get married, their spouses also become members of the HUF. Later, the son’s children become co-partners while the daughter’s children are considered members.
The Hindu Undivided Family (HUF) in India can add co-partners up to four generations, including the Karta.
Question 4: How can form a Hindu Undivided Family (HUF) in India?
Answer: Under the Hindu Undivided Family Act, the following procedures are involved in the HUF registration services in India:
1st Step: Create a Hindu Undivided Family (HUF) Deed
2nd Step: Apply for a PAN for HUF
3rd Step: Open a Bank Account for HUF
Question 5: Who owns the assets of the Hindu Undivided Family (HUF) in India?
Answer: The assets of a Hindu Undivided Family (HUF) in India are collectively owned by all its members. No single individual can claim exclusive ownership.
However, the share of each member can be determined like this: for example, let us assume that Mr. Gupta’s HUF has assets worth Rs. 20 lakhs. Mr. Gupta, his wife, and both children will each have an equal share, meaning Rs. 5 lakhs each. When Mr. Gupta’s children have their own children, those grandchildren automatically become part of the HUF and inherit their parents’ share. So, if Mr. Gupta has two grandchildren, his son’s original ¼ share will now be equally divided among the three of them, making their individual share 12-12ths.
As you must have already noticed, a daughter-in-law does not get a direct share in the assets of the HUF; similarly, a daughter’s husband and children do not get any rights in her father’s HUF.
Question 6: Can Hindu Undivided Family (HUF) in India apply for an IPO?
Answer: Yes, it can because Hindu Undivided Family (HUF) in India is a separate legal entity having its own PAN and bank account. It can also invest in shares, mutual funds, and even apply for IPOs. Any income earned from these IPO investments, whether by way of capital gains, dividends, or interest, will be taxed in the hands of the HUF and not in the hands of the individual.
Question 7: Can Hindu Undivided Family (HUF) in India earn salary income?
Answer: No, Hindu Undivided Family (HUF) in India cannot earn salary income. This is because salary income is linked to an individual’s personal skills, expertise, or employment, and since HUF cannot be employed or provide personal services, it cannot earn a salary. However, there are several sources of income for HUF, such as:
- Hindu Undivided Family (HUF) in India can earn income from the family business. It can also take GST registration.
- Hindu Undivided Family (HUF) in India can earn rental income from properties owned by it.
- It can earn capital gains by selling properties owned by the Hindu Undivided Family (HUF) in India, such as land or shares.
- It can receive dividends, interest, and other returns from investments made in the name of the Hindu Undivided Family (HUF) in India.
Question 8: How much tax does a Hindu Undivided Family (HUF) in India have to pay?
Answer: The taxation process depends on the income earned by the Hindu Undivided Family (HUF) in India. If the HUF earns income from rent, business, and other sources, it will be taxed as per the prevailing slab rates of income tax. The tax slabs and rates will vary depending on the regime chosen. In the case of gains from the sale of property, capital gains will be taxed at specific rates depending on the type of property and whether the gains are short-term or long-term. Like individuals, HUFs can also claim various deductions.
- Basic exemption up to Rs. 4 lakhs.
- Deduction of up to Rs. 1.5 lakh u/s 80C for investments like ELSS, PPF, etc.
- Deduction on health insurance premiums paid u/s 80D.
- Exemption on LTCG of up to Rs. 1.25 lakh from equity investments.
- Exemption on LTCG u/s 54 and 54F from property investments.
Since HUF cannot earn salary income, it is not eligible for a standard deduction of Rs. 75,000 and 87A exemption. Income earned by HUF is taxed in the hands of HUF only. However, if an individual member transfers movable or immovable personal property to HUF, it triggers clubbing provisions under the Income Tax Act. In such cases, income from that property will be clubbed with the transferred income and taxed accordingly.
Question 9: How to save tax with Hindu Undivided Family (HUF) in India?
Answer: Since Hindu Undivided Family (HUF) in India is treated as a separate entity, it can be a smart way to manage taxes, especially if you have income from sources other than salary. Think of it as sharing your income with an additional person in the family, which means the overall tax burden is reduced as both you and the HUF are taxed separately.
Let’s look at some of the ways people save taxes using HUF:
- Real Estate Property:If you own any ancestral property, you can transfer it to HUF. For example, let’s say both you and your spouse are salaried employees and fall under the 30% tax slab. If there is rental income from ancestral property, you will have to pay 30% tax if it was taxed in your hands. However, if HUF owns the property and the rental income is less than Rs 4 lakhs, then you will not have to pay any tax on that income. Even if it is more than Rs 4 lakhs, it will be taxed at a lower slab rate, saving a significant amount of tax.
- Demat Account:You can also open a demat account in the name of HUF; this gives you an additional account to apply for IPOs. This increases the chances of allotment. Also, any gains from stocks or mutual funds in this account will be taxed under the HUF tenure. So, if the gains are long-term, then HUF can claim a tax exemption of Rs 1.25 lakhs every year.
- Property Purchase: Another common way to save tax is to buy a property jointly with the HUF and add it as a co-borrower on the home loan. Since the loan is taken jointly, each borrower, including the HUF, can claim a deduction of up to Rs 2 lakh on the home loan interest under Income Tax Section 24B and a deduction of up to Rs 1.5 lakh on repayment of principal under Section 80C.
So, effectively, by including the HUF as a co-borrower, the family can reduce its taxable income by up to Rs 3.5 lakh every year.
To initially create capital in the HUF, you can transfer money and any movable or immovable property at the time of creating the HUF deed. Any money or property added at this stage will be considered as the capital of the HUF, and the clubbing provision will not apply.
Question 10: What happens when a Hindu Undivided Family (HUF) in India is dissolved?
Answer: There is no automatic dissolution of a Hindu Undivided Family (HUF) in India. A HUF is dissolved when the family decides to divide the assets of the HUF. After the partition, the assets are distributed among the co-partners and members as per their share in the HUF. The distributed assets then become the personal property of the members, and any income earned from them will be taxed in their individual hands going forward.
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Also read: HUF Registration Services In India