The Benefits of Hindu Undivided Family- Legal Angle

Aditya Pratap is a lawyer practicing in the Bombay High Court. He can be reached at aditya@adityapratap.com

Introduction of Hindu Undivided Family (HUF)

HUF means Hindu Undivided Family. A Hindu family can come together and form a HUF. Buddhists, Jains, and Sikhs can also form a HUF. The term ‘Hindu undivided family’ has not been defined in the Income Tax Act as it has already been defined in the Hindu law. However, Section 2(31) of the Income Tax Act, 1960 includes HUF in the meaning of the word ‘person’.

HUF in a nutshell is the income of a family. These incomes are joint incomes and not individual incomes. They cannot be taxed in the hands of a specific individual. They are taxed as an income of the entire family. Thus, HUF is treated as a separate entity.

How to Form a Hindu Undivided Family?

A HUF is automatically formed when a person marries and starts their own family. It is not mandatory for a person to have kids or own a property for them to start a HUF. The minimum requirement to form a HUF is of two members only.

For creating a HUF you would require the following steps:

Step 1: Create a HUF Deed: a deed is required on stamp paper declaring the formation of the HUF. It should include information of the Karta and the co-parceners.

Step 2: Apply for HUF PAN Card: HUF is a separate entity and needs to have its own PAN Card. You can apply for a PAN Card by filling the form 49A.

Step 3: Open a HUF bank account: a HUF is required to have a separate bank account which shall receive all the payments.

How to save Tax by forming a Hindu Undivided Family?

One of the major benefits of the Hindu Undivided Family is that it is considered a separate legal entity. This entitles HUF to obtain a separate PAN card and bank account in the name of the HUF. As a new PAN Card would be allotted to the whole family, it will also enjoy the benefits of Income Tax Rate Slabs.

Provided below is an example to help you get a clearer view of how creating a HUF account would result in tax saving.

After the death of Mr. Ram Verma’s father, he decided to start a HUF with his wife, son and daughter as members. Since, Mr. Verma had no siblings, the property belonging to his father was transferred in the name of the HUF. The property belonging to late Mr. Verma earned an annual rent of 10 lakh. Mr. Verma has an income from salary of Rupees 20,00,000/-. 

Income of Mr. Verma before formation of HUF would be 30 Lakh (20L salary + 10L property rent) and the income tax payable by him would amount to 6,00,000/-.

Income of Mr. Verma after formation of HUF would be 20 Lakh and the income tax payable by him would amount to 3,00,000/-.

Income of the HUF would be 10 Lakh and the tax payable would amount to 1,00,000 /-. The total tax payable by Mr. Verma after forming the HUF would be 4 Lakh only. With the formation of a HUF account, Mr. Verma saved tax of Amount Rupees 2 Lakh! 

Are there any Incomes that are not Taxed as Income of HUF?

Yes, following are the incomes which are not taxed as income of HUF:

  1. If a member transfers his self-acquired property to the HUF without receiving proper sale consideration, income from such property is not taxable in the hands of the HUF. It will continue to be taxed in the hands of the member.
  2. Personal income of the members cannot be treated as income of HUF.
  3. “Stridhan” is an absolute property of a woman, hence income from it is not taxable as income of HUF.
  4. Income from an individual property of the daughter is not taxable in the hands of HUF even if such property is vested into HUF by the daughter.

About the Author – Aditya Pratap

Aditya Pratap is a lawyer practising in Mumbai. He argues cases in the Bombay High Court, Sessions and Magistrate Courts, along with appearances before RERA, NCLT and the Family Court. For further information one may visit his website adityapratap.in or view his YouTube Channel to see his interviews. Questions can be emailed to him at aditya@adityapratap.com.

Cases argued by Aditya Pratap can be viewed here.

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