There are many articles published on HUF (Hindu Undivided Family) but the knowledge around HUF is limited and the majority of the people have shied away from leveraging it for Financial and Tax Planning purposes.
What is HUF?
HUF is a family arrangement covered under the Hindu Law by which a joint family can hold common property under the rules set out in the Hindu Succession Act 1956. Muslims, Parsis and Christians are governed by their own personal laws.
HUF is formed by all individuals who have lineally descended from a common ancestor including wives and daughters of male descendants. HUF consists of Karta who is the eldest person or head of the family and other family members who are either coparceners or members. The children are coparceners in their Father’s HUF while wives are mere members. Post marriage, the daughter continues to be a coparcener of the father’s HUF and a member of the husband’s HUF. Coparceners and members have equal rights in HUF. One important distinction between a coparcener and a member is that a coparcener can enforce the partition of a HUF but a member cannot.
How do you set up HUF?
A HUF can only be formed by a family and not by an individual. It automatically comes into existence when a person gets married.
To take advantage of HUF, one needs to create a deed on stamp paper mentioning the names of Karta, Coparceners and the members. A HUF has a separate identity from its members for income tax purposes, hence HUF needs to have its own PAN card. A HUF also needs to create a Bank Account to facilitate financial transactions.
How do you put money in HUF?
There are multiple ways by which a HUF can acquire assets. The ancestral property which belongs to all the family members can be transferred to the HUF. The property acquired by joint efforts of all the members of HUF can also be put in HUF. A gift can be given to HUF. The gift from the non-family members to HUF up to ₹ 50,000 per annum is tax-free. The gift from the members are not taxed but the clubbing provision applies to the income generated from the gift. The clubbing provision can be bypassed if HUF invests money in products generating tax-free income. HUF can receive a loan from any person including members. A HUF can acquire assets from the partition of assets of ancestors or its coparceners. A HUF can also acquire an asset through Will.
How does HUF generate money?
HUF can invest in most of the avenues available to individuals. HUF can invest in Fixed Deposits, Bonds, ELSS, Stocks, Mutual Funds, Real Estate and Business. HUF can earn rental income from real estate.
HUF cannot invest in PPF.
How is HUF taxed?
HUF is a separate entity for the purpose of tax assessment. HUF can earn income from most of the sources (e.g. capital gains, rent, income from business and income from other sources) except salary.
HUF is taxed at the slab rate of an individual. HUF also enjoys most of the tax deductions (e.g. Chapter VIA – Sec 80C, 80D, 80DD, 80DDB, 80G, 80TTA) available to an individual. In addition, HUF can deduct expenses such as salary paid to Karta from the HUF income.
What are the advantages of HUF?
- Reduces tax liability by creating a separate tax entity
- Create more assessable units by partitioning of HUF
- Karta can give money to coparceners from the income earned by HUF. This amount is tax-free in the hands of coparceners.
- HUF can give loans to Karta or coparceners for business. Interest paid on the business loan is fully deductible.
- Income earned by HUF can be used for family expenses
- HUF can contribute to the PPF account of members and claim tax benefits
- HUF can invest in Life insurance in the name of Karta and claim tax benefits
- HUF can purchase health insurance for the family members of HUF and claim tax benefits
What are the disadvantages of HUF?
- All coparceners have equal rights on the property given to HUF and cannot be sold or transferred without the consent of all coparceners
- The HUF can only be dissolved by a partition. All coparceners have to agree to dissolve the HUF.
- One cannot stop ownership in HUF. It is assigned by birth. As members of HUF grow, the dissolution becomes difficult as more people need to agree to dissolution.
- HUF tax filing needs to be done every year till its partition
What should you do?
HUF if used wisely can become an efficient tool for tax planning and wealth creation, else it would become an unnecessary headache for the family to manage.
If you have income from the ancestral property and expect to inherit financial assets, you can move that to HUF to reduce the tax. Also, if you are maxing all your deductions then it might make sense for you to create HUF, which as a separate assessee can take advantage of another set of tax deductions to lower the tax outgo.
Before setting HUF, it is important to model the complete scenario of how much asset/capital will be put in HUF, how the money will grow and how it will be dissolved. It would be easy to manage HUF if your family structure is simple. Also, it would be important to partition it before it becomes too complex. For the HUF to be sustainable, coparceners should be unselfish and think about the broader good of the family. One unhappy coparcener can derail the HUF.
The writer is a SEBI Registered Adviser and Founder of FinMyn (https://finmyn.com). He provides Fee-Only Financial Planning and Investment Advisory services. If you want to know more about him, click on https://finmyn.com/about/.