HUF: Create HUF to save tax, merits, demerits & Format of HUF Deed

Under income Tax Act 1961, HUF is a person like Individual, Company, Firm etc. It is the short form of Hindu Undivided Family. It means a family consisting of all the members of a family including their wives and unmarried daughters. HUF is a separate entity for the purpose of assessment under the Act. One can save taxes by creating a family unit and pooling assets to form a HUF. HUF has its own PAN and it is taxed separately from its members.

Income Tax Rate of HUF

Tax rate is same as Individual and tax is calculated as per slab unlike companies or firms where tax is calculated at a flat rate on income. Thus, HUF can also avail income exemption upto Rs. 2,50,000 like individual as it has a separate identity.

The Finance Minister Nirmala Sitharaman in Union Budget, 2020 introduced new Income Tax regime from FY 2020-21. In New Income Tax regime, there is an option for individuals and Hindu Undivided Family to pay taxes at lower rates. They have to select the Tax regime for the year in the beginning of the Financial Year (FY). The rates mentioned below shall increase further through cess and surcharge, if applicable.

Income Slab	Existing Rate	New Tax Regime
Upto 2.5L	Nil	Nil
2.5L – 5L	5%	5%
5L – 7,5L	20%	10%
7.5L – 10L	20%	15%
10L-12.5L	30%	20%
12,5L – 15L	30%	25%
15L and Above	30%	30%

HUF is liable to pay Alternate Minimum Tax if the tax payable is less than 18.5 per cent (including cess and surcharge) of “Adjusted Total Income” subject to prescribed conditions. However, AMT provisions are not applicable to an individual, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BOI) and artificial juridical person whose adjusted total income does not exceed Rs 20,00,000.

Read Also: Difference between New Income Tax Rate and Old Tax Rate regime

Income Tax Payable

Tax payable shall be higher of-

1. Tax as per normal provisions; or
2. Tax as per AMT(Alternate Minimum Tax) @ 18.5%

What all are the incomes of HUF?

Generally, Hindu Undivided Family income consists of-

1. Any income from investment of funds of HUF in a company or firm or banks like interest.
2. Capital Gains
3. Income from Other Sources
4. Income from house Property
5. Deductions under section 80 and other exemptions can be claimed by the HUF in its income tax return.
6. Investments can be made from HUF’s income. Any returns from these investments are taxable in the hands of the hindu undivided family.
7. Profits and Gains from Business and Profession

However, it does not  include following income:

1. Personal income of members as it cannot be taxed under HUF.
2. Income from property is included in HUF income but if it is daughter’s property then it cannot be taxed under HUF.
3. Income arising from “Stridhan” cannot be taxed under HUF.

Merits of forming HUF

The main benefit is to save tax by spliting the income. Forming an HUF provides for an additional PAN which can be used to split the income and save some taxes. For instance, there is a family in which husband is earning Rs 20 lakhs and wife is earning Rs. 25 lakhs and they had an ancestral property which had been sold for Rs. 1.5 crore.

Now, if no HUF has been formed then the capital gain would get taxed either in Husband’s income or in wife’s income who are paying tax in 30% income tax slab rate. But if HUF has been formed then such income from sale of property can be shown in HUF and it can be taxed taking the basic exemption limit of Rs. 2,50,000 and lower tax slab.

HUF can also take all the major take deductions just like an individual take. Read Also: Save Tax : 20 Ways to save Income tax in India

Demerits of forming HUF

The only disadvantage is that the assets under HUF shall be considered as the property of all the members of family and all have right to that property including an unborn child.

Thus, each and every member of HUF has equal right to the property and the share in such properties continues to decrease due to marriages and birth. The other disadvantage is that such property cannot be sold unless consent of all members has been obtained. So, one should take care while transferring property to HUF.

Read Also: TDS Rate Chart for FY 2022-23/AY 2023-24 – Income Tax

Latest Update

Law commission has proposed to abolish HUF as it is being used as a tool to avoid taxes as explained above in the “Benefits of forming HUF” section. Accordiing to a research, taxes paid by HUF was even less than 10% against total income declared. If such income was taxed directy to the individual then much of the taxes could have been collected by the department.

HUF Return of Income

Every HUF has to file the return of income if his total income (including income of any other person in respect of which he is assessable) without giving effect to the provisions of section 10A, 10B or 10BA or Chapter VIA (i.e., deduction under section 80C to 80U), exceeds the maximum amount which is not chargeable to tax i.e. exceeds the exemption limit Due date of return filing for Hindu undivided family depends on applicability of audit. If audit is applicable then due date of Tax audit Report is 30^th september for AY 2022-23 and if audit is not applicable then due date for ITR of AY 2022-23 or for Previous year 2021-2022 ITR is 31st July, 2022.

Creation of HUF

Creating HUF is a good option for saving Income Tax. A Hindu Undivided Family for tax purposes can only come into existence if it owns some property or earns some income which is taxable. A single person cannot create HUF, there must be more than 1 person to create HUF. A HUF can be created through marriage, birth or adoption. But one must know that a HUF can be created through various ways like:

1. Through receipt of gifts
2. By inheritance under a will
3. By blending of individual property with the character of HUF property
4. When there is partition in a larger HUF
5. Through Joint labour for the benefit of HUF
6. Reunion of separated coparceners

Method of Gifts or will is widely used for creating HUFs. It is advisable to have a deed for the formation of an HUF.

HUF Deed Format

DECLARATION  

I, ____________________ son Of ________________ ___________________ Residing at ___________ _________________________________ aged ___Adult do hereby declare-  

1. That I am Karta of _________________________ ___  
2. That I received on behalf of the H U F gift of Rs. ___________ by way of CASH/CHEAUE from my FATHER_______________ _________________(name of relative of karta of HUF) on  dt. _______________ this formed the corpus of the HUF.  
3. That the HUF at present is consisting of the followings members- I)    Shri _____________________, Adult, Residing at _________________
   II)  Smt. _____________________, Adult, Residing at _________________
   III) Kumari _________________,Adult, Residing at ___________________  
4. That the above statements are true to the best of my knowledge & belief. Declare this on  _________________  

WITNESS:  Signature

1. —————————- (name) ————————————(sign)
2. —————————-(name) ————————————(sign)

The author of above article is CA Rahul Gaur.

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