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Hindu Undivided Family (HUF) Act – How to Save Income Tax?

In 2022-23, over 875,000 Hindu Undivided Families (HUFs) filed income tax returns (ITRs) and claimed deductions worth Rs 3,803 crores! A HUF is a unique legal and tax entity that is subject to taxation at the same rates applicable to individuals. Since the concept of HUFs as a distinct category of taxpayers was incorporated into the Income Tax Act in 1922, this structure has acted as a legal and effective tax-saving instrument for generations.

However, with evolving family dynamics and social structures, the preference towards HUFs is reducing. In 2020-21, over 925,000 HUFs claimed deductions of Rs 4,173 crores. So, what do you need to know about HUFs?

Here’s a comprehensive guide put together to explain the different aspects of HUFs, focusing on their advantages, disadvantages, structure, and tax benefits.

What is a Hindu Undivided Family (HUF)?

A HUF is a joint family structure where the family is considered a distinct entity separate from its individual members. It commonly holds assets received through wills, gifts, or ancestral property and contributions made by HUF members into the common fund. This structure is unique to Hindu, Buddhist, Jain, and Sikh families in India.

Advantages of HUFs

  1. Tax Benefits: A HUF can be a legal and effective tax-saving instrument.
  2. Inclusivity: An adopted child can become a member but not a co-parcener.
  3. Legal Recognition: The HUF structure is recognised all over India, except in Kerala, providing legal validity to a family’s financial affairs.
  4. Financial Support: Members can easily take out loans under the HUF entity.
  5. Insurance: The HUF can take Insurance policies on the lives of its members.

Disadvantages of HUFs

  1. Transfer of Property: All members have equal rights on the property, and common property cannot be sold without the concurrence of all members. In times of conflict, this can be problematic.
  2. Partition: An HUF can be dissolved by partition after approval from all members, which is a lengthy process.
  3. Limitation on Partnership: HUF is not allowed to become an equal partner in any company. Only the Karta or a HUF member can represent the HUF in an enterprise.
  4. Limited Recognition Abroad: HUF is not recognised in multiple countries, which becomes a problem when members move abroad.

Structure of Hindu Undivided Family

  • Karta (Head of HUF): The oldest male* member who manages and makes financial decisions on behalf of the HUF.
  • Coparceners: All persons directly descended from a common ancestor, minimum 2, get a share in the assets owned by the HUF by birth, and can ask for partition of HUF.
  • Members: Brought into the family by marriage (mother/wife), have a right in the assets of the HUF, entitled to all the benefits from the HUF and its income, but cannot demand partition of the HUF.

* As per a landmark Delhi High Court ruling, a woman can also become a Karta. The Income Tax Act has still not incorporated this.

Tax Advantages of HUF

  • A HUF is subject to taxation at the same rates applicable to individuals.
  • Investments can be made from the HUF’s income, and returns on those investments are taxable in the hands of the HUF.
  • The HUF is eligible to claim deductions under Chapter VI-A.
  • For HUFs, the threshold limit is the same as that for individuals — INR 250,000 under the old regime and INR 300,000 under the new regime.
  • HUFs can claim up to INR 1.50 lakh deduction under Section 80C for principal repayment of a home loan.
  • HUFs can claim deductions under Section 24(b) for interest paid on a home loan.
  • Under Section 54F, HUFs can claim tax deductions on long-term capital gains on assets other than residential house property.
  • Gifts received up to INR 50,000 are tax-free.

Conclusion

Hindu Undivided Families (HUFs) offer a unique way to manage family finances and optimise tax benefits. Understanding their structure and benefits can help families make informed financial decisions. While HUFs provide tax advantages and legal recognition in India, they pose challenges in property management and lack international recognition. As family dynamics and globalisation evolve, the relevance of HUFs may change. Evaluating their effectiveness and staying updated on legal changes is essential. Share your experiences with HUFs and their impact on your family’s financial strategy.

Disclaimer: The information contained herein is for informational purposes and should not be interpreted as soliciting, advertising, or providing any advice.