What is HUF (Hindu Undivided Family)? - Features, Income Tax Exemptions & Allowance

Hindu Undivided Family (HUF)

Hindu undivided family also referred to as HUF is a concept in India’s tax laws and is a form of a joint family. It is regarded as an independent tax-subject, that is, it stands as a single lawful entity apart from the members. The members constituting an HUF are the direct descendants of the mutual ancestor, and their wives, unmarried daughters, minor sons.

Features of HUF

• Separate Taxpayer: An HUF is considered to be an entity for computation of income tax and for filing a separate income tax return.
• Kartha as Manager: The Karta is the senior most male member of the HUF or in some cases it is the eldest female member who has to look after the functioning of the HUF.
• Ownership of Property: It is generally understood that the property owned by the members of the family is HUF property.
• Continuity: It continues its existence for tax and property management after the members of the HUF are no more.

HUF Taxation

The HUFs are chargeable to income tax like individuals and the companies. Income earned by the HUF is taxed in the hands of the HUF only, no other option of tax computation is allowed. Common income sources for HUFs include:

• Rental Income: Income of the HUF in respect of properties owned by it.
• Income from Business or Profession: In case there is business activities or professional services being taken care of by the HUF.
• Capital Gains: Return from the sales of fixed assets which is in HUF.
• Other Income: Interest and dividends receivables and other incomes.

Income Tax Exemptions and Allowances on HUF

HUFs can avail of several tax deductions similar to individual taxpayers:

• Section 80C: Exemptions for section 80 C, 80 D, 80 DD, 80 U and 80 CCG for investments such as PPF, life insurance and ELSS.
• Section 24: Interest on the house bond or any house loan is allowed in accordance to the seventh schedule under section 24.
• Section 80D: Employer-employee agreements regarding employer contribution for health insurance.
• Other Deductions: Some of the allowable expenses: Amounts given to charities, tuition fees, special clothes for work, childcare expenses, traveling in the course of work, etc.

HUF and Succession Planning

One of the very important activity which is carried out effectively through HUFs is succession planning. This implies that families holding property jointly would let their children to transfer the property easily. However, careful consideration of tax implications and potential disputes is essential:

• Will and Testament: Although HUF property is not governed by individual wills it is always better to have clear wills in case of individual members.
• Tax Implications: Understand the legal implications that the HUF has in terms of taxes when transferring property: between members of the HUF and from the HUF to individual shareholders.
• Professional Advice: Incorporate tax advisors and lawyers for the formulation of the succession plan.

HUF and Life Insurance

Life insurance can be a valuable tool for HUFs:

• HUF as Policyholder: Another option can be that the HUF can be the policyholder of the policy and the nominees can be the family members of the policyholder.
• Tax Benefits: HUF is also given certain exemptions and the premiums paid towards life insurance policies may also be claimed under section 80-C.
• Claim Settlement: The HUF can be paid the death benefit in case of the demise of the insured.

HUF and Capital Gains Tax

Profits made in the sale of HUF property, for instance, is charged in the HUF’s tax returns. The tax rate depends on the holding period of the property: 

• Short-Term Capital Gains (STCG): If the length of holding is between 12 to 24 months STCG is charged.
• Long-Term Capital Gains (LTCG): For holding the property for a time exceeding 24 months, LTCG is used.
• Form 15CA and 15CB: Form 15CA and 15CB are declarations that are needed for outward remittance beyond some amount limit. Now, if the HUF intends to remit any amount to foreign territory, they need to adhere to these forms so as to stay out of the taxing authorities’ way.

Issues, Concerns and Factors for the HUF Formation

While HUFs offer tax benefits and estate planning advantages, they also come with certain challenges:

• Compliance Burden: The handling of the accounts of an HUF is quite cumbersome and time taking.
• Potential Disputes: Disputes can be there among the family members, which affects the smooth running of the HUF.
• Limited Flexibility: From the structure of an HUF it can be observed that there is very little flexibility compared to other business structures.

Additional Considerations for HUFs

• Kartha's Liability: The Karta is answerable for the HUF’s liabilities and responsibilities legal responsibility is personal.
• Partition: An HUF can be divided; the property owned by the joint family is said to be segregated in the hands of its members. There’s a problem of taxation and sound planning associated with it.
• Gift Tax: Donations made by the HUF to its members are exigible to gift-tax if the exemptions do not apply.
• Estate Duty: Estate duty may have been repealed in India, but knowledge of what it is constitutes an important aspect of estate planning.

Taking all these into consideration can help you to make the best decisions when it comes to the setting and running of your HUF.