How To Save Tax As A Hindu Undivided Family Entity
A Hindu Undivided Family (HUF) is a tax entity facilitated under the provisions of Section 2(31) of the Income Tax Act. All the members in a family are considered HUF members. The male members are referred to as coparceners and the female members are referred to as members. The eldest male member in the family is referred to as Karta and he is the one who manages the affairs of the family. Till March 2018, there were an estimated 2 million registered HUF’s in India.
Of late, there have been many discussions around its efficacy and intentions. Here’s everything you need to know about an HUF.
How does an HUF work?
A boon to a large number of families in India, the HUF is a concept recognised under the Income Tax Act of 1961 and finds its roots in the Hindu joint family system. Chartered accountants propose this tool to joint families to save tax. Under this, the incomes earned by such families is considered one and not taxed separately. Such a family also has a separate PAN card that recognises the joint family as one entity while the individual members also have their own PAN cards. Tax is paid by the family using the family’s PAN card and not their individual cards.
What is the logic?
A joint family enjoys the benefit of income tax slab rates when it resorts to the HUF tax saving. Income is tax free up to a specified limit or is taxed progressively at 10-30 per cent which results in tax-saving for many families most of whom are into businesses.
How is the property treated?
The Karta manages the family property which is a joint property but the coparceners (male) can demand its partition by way of distribution. However, women who are called members cannot demand distribution but are entitled to receive maintenance from the HUF.
How much do you get to save?
This will vary from one household to another and will also depend on the income being declared. A HUF can save substantially by offering independent slab benefit of Rs 2,50,000. Additionally, various tax exemptions also add to the savings of a joint family running a joint business. You could also claim deduction if you are paying a salary to any of the HUF member within your family if it is reasonable, in the interest of the family business and paid under a bona fide agreement.
Income after allowing deductions under Sections 80C, 80D, 80DD, 80DDB, 80G, 80GGA, 80GGC, 80-IA, 80-IB, 80,-IC, 80-ID, 80-IE and 80JJA will be considered as total income and would be taxed at the prescribed rate. Other exemptions include Section 54, 54B, 54D, 54EC, 54F, 54G. Rebate under Section 88E would be allowed while education cess at two per cent, higher education cess at one per cent plus additional surcharges would be levied.
Other features of an HUF
- Although women are ‘members’, if they bring in monetary gifts or assets through marriage, all details must be documented and shown in the HUF account but not if it is a separate asset altogether.
- All assets of the HUF belong to the family and not an individual.
- Karta cannot transfer or gift the HUF property but he may do so for women within the HUF or even a son.
- Immovable property can be gifted only in the case of events like marriage of a daughter.
- Part or the entirety of a property can be sold only if all the HUF coparceners/members agree to it.
- An HUF cannot be an equal partner in a company, they can just represent in an enterprise. However, income received will be taxed.
- Financing of an HUF can happen through inheritance or gifts with gift tax laws being applicable.
- HUF doesn’t apply if members move abroad for work or studies.
How to start an HUF?
You will need:
1) HUF Deed with details about the karta, coparceners and the business.
2) A PAN card in the name of the HUF is also mandatory. Check for Form 49A.
3) Bank account in the name of the HUF is essential.
4) A demat account in the name of the HUF
5) Proper documentation/book of accounts
6) Income tax returns
In late 2018, the Law Commission recommended that India should do away with the HUF system altogether citing various anomalies and gaps that arise of such a system. While it does help various joint families, it has also to an extent given rise to tax evasion. However, it is not the first time that this lacuna has been pointed out. The Direct Taxes Enquiry Committee Report, 1971 came up with this finding post which partial partition of HUF was de-recognised. However, some others are of the opinion that HUFs do not help save as much tax as the effort that goes in to maintain the documents and records of the movements within the household’s business.
Likewise, the proposal to abolish HUF has met with severe criticism among traders who ask why it should pinch the government to give a little tax benefit to those running a family business and living in joint families. Therefore, abolishing the HUF entity may be a tough task for the government although Kerala abolished it by virtue of the Kerala Joint Hindu Family System (Abolition) Act 1975, effective from 1976. It did provide for the HUF property to be divided among all its members thereon.