Historically, the Indian subcontinent has had a tradition of a Joint Hindu Family, an extended family arrangement having many generations of members living in the same home, bound by the sacred familial bond. This family typically consisted of a husband and wife, their sons, their unmarried daughters, and their sons’ wives and children, with the pattern repeating for countless generations down the line. This family is headed by a person called 'karta', traditionally the family’s senior male member.
Based on this, the Hindu Undivided Family (HUF), a term related to the Hindu Marriage Act, found itself in the Income Tax Act for these families to save taxes pooling in assets to form a 'HUF'. In essence, members of the HUF are taxed together as a group and not individually. This can provide a massive boost to the tax planning of these families.
Note that Buddhists, Jains, and Sikhs can also form a HUF.
How is the HUF taxed?
HUF is taxed separately from its members, deductions and exemptions can be claimed separately. Say, you and your spouse along with two children decide to create a HUF, not only can you continue claiming deductions under Section 80C, but also the HUF as a whole can claim the deduction too. In fact, your HUF will have its own PAN card and can act as a separate individual, filing separate tax returns at the same rates as an individual.
Apart from the deductions and exemptions, your HUF can also have a life insurance policy on the members and make investments in all kinds of assets. Members of the HUF can be paid a salary if they contribute to its functioning too, which can be deducted from the HUF income.
Requirements to form a HUF
- The HUF need not be a resident of India, but must be a person of Indian and Hindu origin
- An individual cannot form a HUF
- A HUF is automatically created at the time of marriage.
- A HUF must consist of a common ancestor and all of his lineal descendants.
- Once formed and registered, A HUF should have a legal deed containing details of the members, a PAN number, and a bank account in the HUF's name.
Disadvantages of HUF
i) Same rights to every member: Every HUF member getting to have the same rights on every joint asset, while democratic, can be messy. Quite often, important decisions like the sale of common property cannot go ahead without the approval of every member.
ii) Partition: Partition of the family with a small group may lead to the dissolving of the HUF. Closing the HUF is much more difficult than starting one. As mentioned earlier, all assets must be equally distributed and this can be an arduous process, with legal hassles creating more disturbances in it.
iii) Joint families losing their relevance: Joint families are increasingly losing their importance and relevance with growing urbanization. Several cases of fights in HUFs over petty issues or property have also been dominating the headlines, with some of our friends or relatives facing these issues too. Adding this to the increasing rates of divorce, HUF is rapidly losing its relevance as a tax saving tool as well.
Although a very neat and useful tax planning tool, the Hindu Undivided Family is useful only if there is a genuine need or will to be an undivided family. In our times where nuclear families are much more popular, individual ownership of assets and privacy in families more important than tax saved, the HUF has/is quite likely started seeing a decline in metropolitan, urban and rural areas.
Hindu Undivided Family (HUF) - Frequently Asked Questions (FAQs)
1) Can a woman be the karta of the HUF?
After a landmark Supreme Court case in 2016, the senior-most woman can also take up the role of the karta (although this amendment has not been formally included in the Income Tax Act).
2) Do daughters have an equal right to property in HUF?
The Supreme Court insisted strongly that daughters cannot be deprived of the right to equality in any of the decisions and inheritance of the HUF
3) When is the due date for tax filing of HUF?
The due date for the tax filing of a HUF is on 31st July every year
4) Is the HUF recognized everywhere?
Except for Kerala, the HUF is recognized everywhere in India
5) What if the eldest male member in the family is an NRI?
The status of the HUF does not change just with the eldest male member or the karta being an NRI