Introduction

HUF is an asset such as a gift, a will, or ancestral property, or property acquired from the sale of joint family property or property contributed to the common pool by members of HUF.

A Hindu undivided family is a family which has a common male ancestor who holds a joint family property and not been subjected to partition.

Components

  • All the male members are a part of it either by virtue of birth or by adoption.
  • All the unmarried daughters are a part either by birth or adoption.
  • All the widows.
  • All the women who have been abandoned by their husband.

Eligibility

  • A family forms a Hindu Undivided Family, not an individual.
  • It consists of a common ancestor and all of his lineal descendants, including their wives and unmarried daughters.
  • Hindu’s, Buddhists, Jain’s and Sikhs can form Hindu Undivided Family.

Tax saving 

  • It has its own PAN and then a separate tax return is filed.
  • A separate joint Hindu family business is created as it has an entity which is separate from its members.
  • Deductions that are under section 80 and other exemptions can be claimed by it.
  • An insurance policy can be taken on the life of its members through it.
  • It can also pay salary to its members if they are contributing to its functioning and the work of the joint Hindu family business. This salary is an expense and can be deducted from the income of it.
  • It is taxed at the same rates as the individual.

If a member wants to form another Hindu Undivided Family with his wife and children, the income of the property which was transferred from the original to new HUF is taxed.

Example,

After the death of his father, Mr. Ramesh Garg decides to start an HUF with his wife, son, and daughter as members. Since Mr. Garg has no siblings; property held by his father was transferred in the name of Mr.Ramesh. The property held by late Mr. Garg earns an annual rent of Rs 8.5 lakhs. Mr. Ramesh Garg has an income from salary of Rs 25 lakh.

HUF

Due to this tax arrangement, Mr. Garg saved tax of Rs 1,63,770.Both HUF and Mr. Garg (and other members of the HUF) can claim deduction under section 80C. Also, income from it can further be invested.

Drawbacks of HUF

  • Equal rights of members

The greatest disadvantage of opening an HUF is that its members have equal rights on the property. The common property cannot be sold without the concurrence of all the members.

  • Too large to manage

Any additions to the family, by way of birth or marriage, become a member of the HUF and get equal rights.

  • Partition

At time of partitioning, HUF can only be dissolved and all members have to agree to dissolve it. Under a partition, assets are distributed to members which can create disputes.

  • Joint family system losing relevance

In today’s scenario, it is losing relevance because of nuclear families, Divorces, separation etc.

Conclusion

It seems that forming an HUF is usually perfect way to save taxes, but it also comes with its own drawbacks.

For any help on ITR Filing feel free to consult the tax experts at LegalRaasta. You can file ITR yourself via our ITR software or get CA’s help on filing income tax return. You can also use the option of Business ReturnBulk Return or Revised Return Filing.