Hindu Undivided Family (HUF) Tax Planning

The Hindu Undivided Family (HUF) is an effective tax saving instrument that is compliant with all the legal structures of the Income Tax Department. There are a number of salient points to be taken into account when forming this entity.

Payment of income tax to the government is one of the primary duties of the Indian citizen. However, since income tax is a substantial percentage of one’s income, people are always looking for ways to reduce this liability. Hindu Undivided Family is one such entity that if formed, can act as a tax saving instrument. This is an effective and legal way to save tax.

The concept of Hindu Undivided Family is especially applicable in the Indian context since Indian culture consists of joint families where many times even the income earned is joint and not individual. Since, these incomes are joined, income tax cannot be levied on an individual income. Hence, the income tax levied is charged on the whole family as a unit. This means that the family as a unit needs to hold a separate PAN card for earning income and paying tax as a Hindu Undivided Family.

How HUFs help to Save Tax?

The most important point about saving tax by forming HUFs is to hold two separate PAN cards. Since, the income is not in the hands of a single individual, a new PAN card is allotted to the family as a whole and the tax is then paid by the family using this Pan card.

Example: Let us take an example of Amit who earns an income of Rs.30 lacs per annum and is married. His wife, Seema earns an income of Rs.40 lacs per annum and hence both Amit and Seema fall in the income tax slab of 30%. The couple also has an annual income of Rs.10 lacs which is obtained as rent from their ancestral property.

In this case, if Amit pays income tax on this income from property, Rs.10 lacs, then he would need to pay 30% of 10 lacs which is Rs.3 lakhs as tax. Similarly, if this income from property is taxed in the hands of Seems, then again an income tax of 30% of Rs.10 lacs which is Rs.3 lacs will need to be paid.

In case Amit and Seema decide to split the amount as Rs.5 lacs of property income each, then too 30% of Rs.5 lakhs plus 30% of Rs.5 lacs will need to be paid. Which again equals to Rs.3 lakhs in total.

In the above listed scenario, the best option for Amit and Seema is to form a Hindu Undivided Unit or HUF in their names and then obtain a separate PAN card for the same. The income from property worth Rs.10 lacs will then be charged at a lower rate in the income tax slab and will amount to nearly Rs.1 lac which is around Rs.2 lacs less than the earlier income tax payable.

The above example takes into account the income from property to illustrate the effect of formation of HUFs in tax saving. Several other income types can avoid heavy taxation if shown under income of an HUF.

Significant Features of Hindu Undivided Family (HUF):

There are certain advantages as well as disadvantages of forming a Hindu Undivided Family. These are listed below. Also listed are certain features that are specific to HUFs.

  • The foremost benefit of forming an HUF is that you get to avail an extra PAN card in the name of a new entity and thus income and income tax can be split into smaller chunks thereby leading to tax saving on a variety of income types.
  • There is a major drawback of forming a Hindu Undivided Family. This is related to ownership of property. Any assets in the name of Hindu Undivided Family and any income earned by HUF is in the name of the entire family and not on an individual’s name. Care should thus be taken when property is being transferred to HUF since the whole family becomes the owner of that asset.
  • HUFs are also mandated to pay income tax every financial year. The income is taxed as per the existing tax slab rates and audit of the same is also required if the annual turnover of the HUF is more than Rs.25 lacs per annum.
  • Due date of tax filing for HUFs is also the same as 31st July of each financial year. However, in case the HUF falls in the category of units that require audit then the tax paying date is extended to 30th September.
  • HUFs are a recognized entity in the whole of the country except for the state of Kerala. In Kerala, HUFs were abolished as a result of the Kerala Joint Family System (Abolition) Act 1975.
  • An adopted child can be made a member of an existing HUF. However, this child cannot become a coparcener. Co-parceners are members who can demand the partition of a Hindu Undivided Family.
  • Formation of HUF is allowed for both residents of the country and for Non-Resident Indians (NRIs). This depends upon where the HUF is residing.
  • The bank account for an HUF should either be in the name of the HUF or in the name of the karta of the HUF.
  • Only the karta of an HUF is authorized to sign cheques and carry out financial transactions on behalf of the HUF. However, a karta may authorize any other member of the HUF to do so.
  • Any HUF needs to have at least two members of the same family out of which one should be male.

Apart from the points listed above, there are some other legal points too that need to be taken care of while forming a Hindu Undivided Family. HUF is an important tool used by Chartered Accountants to help their clients save tax on their income. However, formation of HUF is easy and simple but the dissolution of the same is tricky since it requires the consent of all HUF members. Experts are of the view that running a HUF can be a tricky business that requires expertise. Assets under the name of HUF cannot be sold or inherited individually. HUFs with a few members may run smoothly while those that have a higher number of members may have complex issues to deal with. Nonetheless, HUFs are an important tool to revisit taxation of income and reap benefits.

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