Frequently asked questions on saving tax via Hindu Undivided Family (HUF): the complete guide
This article compiles an exhaustive list of FAQs on the concept of tax saving by creating an HUF.
Frequently asked questions on saving tax via Hindu Undivided Family (HUF): the complete guide
Posted on 30 Mar 2024
Author: Sayan Sircar
16 mins read
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This article compiles an exhaustive list of FAQs on the concept of tax saving by creating an HUF.
FAQ: Hindu Undivided Family (49 items)
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What is a Hindu Undivided Family (HUF) according to the Income-tax Act 1961?
A Hindu Undivided Family (HUF) is considered a ‘person’ under section 2(31) of the Income-tax Act, 1961. It stands as a separate entity for the purpose of assessment under the Act. An HUF comprises all persons lineally descended from a common ancestor, including their wives and unmarried daughters. It’s noteworthy that an HUF is not formed through a contract; it is automatically established within a Hindu family.
Can a daughter be denied a share in the self-acquired property of her father which is a part of the HUF?
A daughter is a second degree co-parcener in the HUF and is also a Class I legal heir of her father. Therefore, she cannot be denied her share of her father’s self-acquired ancestral property whether or not that property is a part of the HUF.
Can a daughter-in-law be a member of the HUF?
A daughter-in-law becomes a member of the HUF whose member her husband already is, if any. But she does not become a co-parcener and therefore does not get rights upon the property and other assets held by the HUF.
Can a HUF be an NRI?
The residency status of the HUF, NRI or Resident Indian, depends on where the HUF is managed from (India or abroad) and not where the karta stays.
Can an adopted child become a co-parcener of the HUF?
An adopted child can become a member but not a co-parcener of the HUF.
Can an HUF have only husband and wife?
Since an HUF is automatically created at the time of marriage, a husband and wife can be in a HUF without needing to have children.
Can capital gain tax be saved if the members of a HUF transfer assets to the HUF?
Due to clubbing provisions under Section 64, there is no benefit of saving capital gains tax. The original owner of the assets will have to pay tax when the transferred assets are sold.
Can daughters become karta of the HUF?
As a second degree co-parcener of her father’s HUF, the daughter can become the karta upon the death of her father. Her mother cannot be karta but her brother can.
Can daughters still be karta of her father's HUF after marriage?
Daughters can remain the karta of her father’s HUF after her own marriage. However, she cannot be the karta of her husband’s HUF, either belonging to the husband (at the time of marriage with her husband) or of her in-law’s.
Can HUF be added as an owner of a property to save tax on rental income?
Tax is paid by the entities who put up capital to acquire the property. Therefore it is considered tax evasion to transfer the rental income to the HUF to save tax.
Can HUF inherit ancestral property?
The HUF can inherit ancestral property from any of the member’s ancestors. For example, if Mr. X and his spouse and kids constitute a HUF, then property of Mr. X’s father Mr. XF, or Mr. X’s grandfather Mr XGF (or even the great-grandfather) can pass on to the HUF upon the death of Mr. F. HUF can also receive property via will tax-free.
Can HUF invest in ELSS mutual funds to save tax?
An HUF is eligible to save tax under Section 80C via investments like ELSS, PPF and 5-year tax-saver FD.
Can HUF invest in NPS to save tax?
An HUF is not allowed to invest in NPS and therefore there is no question of saving tax via investment in NPS.
Can HUF invest in PPF?
A HUF can invest in PPF and get full 80C tax benefits. Since PPF is exempt from all tax (EEE mode), then there is never any tax on PPF.
Can HUF members save tax by transferring their self-acquired property to the HUF?
HUF members and co-parceners, if they transfer self-acquired property without sale consideration, like a gift, will not get any tax benefit from that transfer. This property will be taxed in the name of that individual who acquired it and not in the name of the HUF.
Can HUF receive gifts from non-members to save tax?
Any gift, above the value of ₹50,000/year, received from non-members is taxable. There is no benefit in such a transfer from the perspective of saving tax.
Can HUF take a home loan?
An HUF can be a co-applicant in a home loan if and only if
- the karta is a co-applicant
- the HUF must be able to provide least three years of income tax return
- the HUF must have a minimum income (the amount depends on the city)
Being a co-applicant, the HUF can get 80C and Section 24 tax benefits as per choice of the tax regime and whether the property is rented out or not.
Can Karta receive salary from the HUF for running the HUF?
HUF can give salary to the Karta for running the HUF within reasonable limits. This amount will get added to the existing income, if any, of the Karta so that there is no special benefit. Coparceners cannot receive salary.
Can tax on dividends saved by gifting shares to the HUF?
Under Section 64(2) of the income tax act, income from gifted assets like dividends from stocks will be clubbed with the income of the person making the gift. There is no wealth tax to be paid by the HUF at the time of gifting if the gift comes from HUF members or from relatives of HUF members.
Can tax on interest saved by making FD in the name of the HUF?
Under Section 64(2) of the income tax act, income from gifted assets like interest from FD will be clubbed with the income of the person making the gift. There is no wealth tax to be paid by the HUF at the time of gifting if the gift comes from HUF members or from relatives of HUF members.
Can tax on rent saved by gifting property to the HUF?
Under Section 64(2) of the income tax act, income from gifted assets like rent from property will be clubbed with the income of the person making the gift. There is no wealth tax to be paid by the HUF at the time of gifting if the gift comes from HUF members or from relatives of HUF members.
Can the HUF karta sell HUF property without consent from members?
The Supreme Court, in October 2023, has said that the Karta of the HUF can dispose off the assets of a HUF, like property, without consent from any minor member of the HUF.
Can wives or daughters-in-law become a karta?
Both wives and daughters-in-law who enter a HUF due to marriage are members and not co-parceners. Therefore they cannot become a karta when the karta passes away. The karta has to be any co-parcener. A wife cannot be a karta of the HUF implicitly created at the time of her own marriage even if her husband dies. That role will pass on to her children (including daughters) or grandchildren or great-grandchildren in that order.
How is assessment conducted after HUF partition under Section 171?
Once a joint family income is assessed as HUF income, it continues until coparceners claim partition before the relevant assessment year. An inquiry is conducted by the Assessing Officer after receiving the claim, determining the partition’s existence and date. Income until the partition date is assessed as HUF income; post-partition, it’s taxed as individual income. If a recipient forms another HUF, the income from partitioned property is charged to the new HUF.
How is HUF created via marriage?
An HUF is automatically created at the time of marriage. So a husband and wife can be in a HUF without needing to have children. To make the arrangement formal, an HUF deed can be created either on the day of marriage or at any future date.
How is the assessment of HUF conducted under the Income-tax Act?
An HUF is recognized as a distinct assessable entity under the Act with it’s own PAN card.. For its income to be assessed, two conditions must be met: Firstly, there needs to be coparcenership within the family. Once an HUF’s income is initially assessed, it continues to be evaluated as such until partition is claimed by coparceners. Secondly, there should be joint family property, including ancestral property, property acquired using ancestral property, and property transferred by its members.
How is the income treated if a member receives fees or remuneration in a company or firm where HUF funds are invested?
If the fees or remuneration is earned due to the investment of HUF funds, it may be treated as income of the HUF. However, if it’s earned for personal services rendered by the member, it’s considered the member’s personal income.
How is the taxability of HUF determined?
To calculate the income of an HUF, one needs to ascertain its income under various heads, excluding incomes exempted under specific sections of the Income-tax Act (sections 10 to 13A). It’s important to consider these aspects while computing the income of the HUF.
How many minimum co-parceners must a HUF have?
An HUF must have two or more co-parceners to be considered eligible for separate taxation. However, the smallest HUF, between a husband and wife, has only one co-parcener i.e the husband. An HUF with only one co-parcener does not have any tax benefit since everything is taxed in the name of the single co-parcener.
How to apply for the PAN card for an HUF?
The PAN card for an HUF is created by filling Form 49A. Here are some samples.
How to do tax-filing for an HUF?
The whole point of creating an HUF to save tax is to create another taxable entity in the family that has its own PAN card. Therefore, the HUF must file its tax return every year just like you and me.
How to save tax by creating HUF?
HUF is separate from its members from the concept of taxability. Therefore deductions like 80C (PPF, ELSS mutual funds etc.) are applicable to HUF to save tax.
How to save tax via HUF on rental income?
Since a HUF can inherit ancestral property, the rental income from that property is now taxed in the hands of the HUF and not clubbed with the members. This leads to saving of tax if the income of the HUF is lower than that of the members.
How to transfer assets to the HUF?
Gifts from members and co-parceners are tax-free for the HUF. However, gifts from non-members is taxable above ₹50,000/year.
Is an HUF eligible for deductions while calculating its taxable income?
Yes, an HUF is entitled to deductions available under Chapter VI-A, as applicable, when computing its taxable income.
Is remuneration paid by the HUF to the karta or any other member deductible from the HUF's income?
Yes, remuneration paid by the HUF to the karta or any member is deductible if it meets certain criteria, like genuineness, reasonability, and is paid under a valid agreement.
Is there any tax if the karta or members of the HUF gift any assets to the HUF?
Under Section 56(2)(x) of the Income tax act, members of the HUF are its relatives. So, there is no tax if the karta or the members (coparceners) gift any assets, like property, shares or mutual funds to the HUF with or without any adequate consideration. However, under Section 64(2) of the income tax act, income from such assets like dividends or interest will be clubbed with the income of the person making the gift.
What's the effect of partial partition (Section 171(9))?
The effect of partial partition (Section 171(9)) is as follows:
- After December 31, 1978, partial partitions aren’t recognized under the Act if assessed previously as an HUF.
- If the conditions apply, the family continues to be assessed as if no partial partition occurred.
- All members before the partition are jointly liable for any tax or penalties owed by the HUF, according to their allotted share.
What are the 4 degrees of co-parcenary in the case of HUF members?
All members of the HUF are not co-parceners by default. Only the karta and co-parceners have rights to HUF-held assets like property. The first degree is the first time holder of ancestral property if any. The next degrees are their sons and daughters, grandchildren and great-grandchildren.
What are Total and Partial partitions under HUF?
Total Partition: The entire joint family property is divided, terminating the family as an HUF.
Partial Partition: It can be regarding persons constituting the family or properties held. Coparceners may separate partially while others remain joint. Property can be partially divided while retaining joint family status.
What factors should one consider when computing the income of an HUF?
The income of an HUF is computed considering various heads of income, excluding exemptions under sections 10 to 13A of the Income Tax Act. Investment of HUF funds in companies or firms and remuneration received by a member, among other factors, influence the computation.
What happens to the HUF if the karta dies?
When the karta dies, the eldest male member or female member, who is a biological descendant of the karta (child, grandchild or great-grandchild) becomes the new karta. Daughter of the karta can be the new karta. Her mother, i.e. the karta’s wife, or a daughter-in-law in the family, cannot be the new karta.
What incomes are not taxed as the income of an HUF?
Several incomes are not taxed as the income of an HUF, including self-acquired property converted into joint family property, income from impartible estates, personal incomes of members, Stridhan (a woman’s absolute property), and income from individual property of a daughter.
What is considered as Ancestral Property under HUF taxation?
Ancestral property is defined as the property inherited from any of the three immediate male ancestors: father, grandfather, or great-grandfather. Any property inherited from a relation other than these immediate ancestors isn’t considered ancestral property. The income from such ancestral property held by certain family setups like a family of widow mother and sons, a family of husband and wife with no child, among others, is taxable as the income of the HUF.
What is Partition of HUF and who is entitled to a share?
Partition signifies property division. It can occur physically or, when not feasible, as the property allows. While coparceners can claim partition, other entitled persons include a son in the womb during partition, the mother, and others as mentioned in the Act.
What is partition of the HUF?
A partition, which can be partial or total, is the abolishing of the HUF status and resultant division of the HUF assets within the co-parceners. Members who are not co-parceners, like daughters-in-law, wives and adopted children cannot ask for partition. All co-parceners have to agree for the partition to happen.
What is the tax rate applicable to an HUF?
An HUF is taxed at the same slab rates applicable to an individual. Additionally, an HUF might be liable to pay Alternate Minimum Tax under certain conditions if the tax payable is less than 18.5 percent of the Adjusted Total Income, including cess and surcharge.
Who does an HUF consist of under Hindu Law?
According to Hindu Law, an HUF constitutes a family comprising all descendants from a common male ancestor along with their wives and unmarried daughters. This concept extends to Jain and Sikh families under the Act, despite not being governed by Hindu Law.
Who owns the assets of the HUF?
All four degrees of co-parceners i.e. karta and their children, grandchildren and great-grandchildren as equal owners of HUF property. Members are not owners. As more and more biological members increase, due to births, the HUF assets are subdivided. It must be kept in mind that partition requires consent from all co-parceners.
Related Articles
- How to set up a HUF to save taxes in the right way?
- Gift tax exemption rules: who can receive gifts from relatives that are tax-free?
- Income clubbing: Are you trying to save tax by investing in the name of your parents or wife?
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