The HUF is a family made up of all individuals linearly inherited from the same ancestor, as well as the wives and daughters of the male ancestors. It comprises of the Karta, who is normally the oldest person or head of the household, whereas the other family members are coparceners. The Karta handles the day-to-day business of the HUF. Kids are now the coparceners of their dad’s HUF. When a woman is married, she becomes a part of her husband’s HUF, although she continues to be a coparcener of her dad’s HUF. 

HUF is the Hindu Undivided Family. You could save taxes by forming a family unit and accumulating funds to create a HUF. The HUF shall be charged differently from its participants. The Hindu family will work together to create a HUF. Buddhists, Jains, and Sikhs may also make up the HUF. HUF will have its own PAN and submit tax returns independently of its members.

Under section 2(31) of the Income-tax Act, 1961, the HUF is deemed to be a “person” and is thus regarded as a separate entity for taxation purposes. Frequently, families holding ancestral properties and enterprises receive a different Permanent Account Number (PAN) in the name of the HUF.

This is achieved in such a manner that the revenue received from the properties and companies held by the HUF is measured individually, which therefore decreases the tax burden of the family. The HUF shall be assessed at the very same rate as that applied to the individual income tax assessee.

How is HUF formed?

While there are tax benefits with establishing a HUF, a few other terms should also be met.

  • One individual cannot establish a HUF, just a family can create it.
  • The HUF is formed naturally at the time of marriage.
  • HUF comprises an ancestor and all his direct heir, which include their spouses and unmarried daughters.
  • Hindus, Buddhists, Jains and Sikhs could also establish HUFs.
  • Generally, HUF has assets that arrive as a gift, will, or ancestral property, or property obtained from the selling by members of HUF of common family estate or property attributed to the common pool.
  • If the HUF has been created, it should be officially registered with its name. A HUF is expected to include a legal deed. The act shall include descriptions of the representatives of the HUF and the business of the HUF. In the name of the HUF, a PAN number, as well as a bank account, must be created.

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How to save Taxes?

A HUF is taxed differently from its participants, thus the exemptions (like Section 80) or exemptions permitted underneath the tax laws could be asserted by it individually. For instance, if you and your spouse alongside your 2 children chose to develop a HUF, all 4 of you and even the HUF can declare a deduction for Section 80C. HUF is generally used by family members as a tool to establish assets.

How is this type of business taxed?

  • HUF will have its own PAN and submits a different tax return. A distinct joint Hindu family business is set up as it has an agency independent from its founders.
  • Deductions u/s 80 as well as other deductions may be asserted by the HUF in its ITR.
  • HUF may have a life insurance policy for its members.
  • HUF may pay its participants a salary if they participate in the operation of the HUF. This salary expense will be excluded from the revenue of the HUF.
  • Investments may be created from the profits of HUF. Any return on these contributions shall be taxable in the hands of the HUF.
  • The HUF is taxed at identical rates as a normal individual in India.