What is HUF?
A Hindu Undivided Family (HUF) is recognized as a distinct legal entity for tax purposes under the Income-tax Act, 1961. Under Section 2(31) of the Act, it is considered a “person” for taxation. An HUF comprises members who are descendants of a common ancestor, along with their wives and unmarried daughters. Unlike other entities, an HUF is created automatically based on the status of a Hindu family. This inherent formation provides substantial opportunities for tax planning and wealth management. In this article, we will discuss the concept of HUF, its functioning, and its advantages in taxation.
Understanding what is HUF?
HUF (Hindu Undivided Family) is a family structure that helps in tax planning by combining assets and forming a single legal entity. Once established, the HUF is taxed separately from its individual members, making it an effective way to save on taxes. Any Hindu family—including Buddhists, Jains, and Sikhs—can create an HUF. It has its own PAN and files tax returns independently.
Members of an HUF, including the Karta (head of the family), are known as coparceners. They are related to each other and inherit a portion of the family property by birth, limited to the first four generations. Earlier, only sons were considered coparceners, but since 6th September 2005, daughters also have equal rights. They can inherit family property and request a partition if desired.
A HUF includes
Resident HUF: A Hindu Undivided Family (HUF) is considered a resident of India if the control and management of its affairs are conducted wholly or partly within the country. Non-Resident HUF: If the control and management of an HUF’s affairs are completely outside India, it will be classified as a non-resident. Resident and Ordinarily Resident / Resident but Not Ordinarily Resident:For a resident HUF to be classified as a Resident and Ordinarily Resident (ROR), the Karta (head of the family) must satisfy the same two conditions that apply to individual taxpayers:
- The Karta must have been a resident in at least two out of the ten years preceding the relevant previous year.
- The Karta must have stayed in India for at least 730 days during the seven years immediately preceding the relevant previous year.
How Does HUF Benefit its Members?
Tax SavingsAn HUF is taxed under the same income tax slabs that apply to individual taxpayers.
Since it is treated as a separate taxable entity, an HUF enjoys the basic exemption limit of ₹2.5 lakh on its total taxable income. This benefit is available in addition to the individual exemptions and deductions that you and your family members may already claim.
Moreover, the following types of income are not taxable in the hands of an HUF:
- Income from property transferred by a member to the HUF without adequate consideration.
- Income from a woman’s personal property.
- Income from an impartible estate, which is taxable in the hands of the estate holder and not the HUF.