Introduction: HUF (Hindu Undivided Family)

Under section 2(31) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act,' the Hindu Undivided Family ('HUF') is classified as a 'person.' For the purposes of assessing under the Act, the HUF is considered a separate entity. An HUF is a Hindu family that includes all people who are lineally derived from a common ancestor, as well as their wives and unmarried daughters. A HUF is founded automatically in a Hindu Family and cannot be created through a contract. Despite the fact that Jain and Sikh households are not governed by Hindu law, they are treated as HUFs under the Act.

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Points to Consider When Forming a HUF and The Format of the HUF Deed

• For the purposes of filing an income tax return, a HUF is considered a separate entity under the Income Tax Act.
• The same tax slabs apply to HUFs as they do to individual taxpayers.
• You are unable to transfer your own assets or funds into HUF.
• If you have an ancestral property and are earning money from it, you might consider transferring it to a HUF to save tax up to the individual exemption level.
• You might put money into your HUF from the sale of ancestral property or assets.
• HUF property income can be invested in instruments such as shares, mutual funds, and other instruments and will be assessed under HUF.
• It is not necessary to have property or several members to create a HUF. Even though a family does not own any property, it can still be considered a Hindu joint family. This cohesion is defined in terms of faith and food. This is due to the fact that a Hindu is born into a big family.
• Any gifts received by HUF members (birthdays, weddings, etc.) might be considered HUF assets.
• Because the HUF is taxable as a separate person for income tax purposes, the basic exemption of Rs. 2.5 lakh can be used to avoid tax. The HUF will also benefit from the income tax slab structure.
• Aside from the basic exemption of Rs. 2.50 lakh, there is also a section 80C deduction of up to Rs. 1.50 lakh.
• For example, if you are in the 30% tax rate, the following is an estimate of the tax savings by forming a HUF:
  • Up to Rs. 2,50,000 in basic exemption = zero
  • @5%, Rs. 2,50,000-5,00,000 = Rs. 25,000
  • @ 20%, Rs. 5,00,000-10,00,000 = Rs. 1,00,000
  • Rs. 1,50,000 in deductions under section 80C
  • As a result, the total tax payable by a HUF on a Rs. 6,50,000 income is just Rs. 12,500.
  • If this income of Rs. 6,50,000 is taxed at 30%, the tax owing is Rs. 1,95,000 in individual hands.
  • As a result, by forming a HUF and shifting ancestral property income and other income to it, you can save a total of Rs. 1,82,500.

Remember: If the tax payable is less than 18.5 percent (including cess and surcharge) of "Adjusted Total Income," a HUF is liable to pay Alternate Minimum Tax, subject to certain criteria.

The Following Earnings Are Exempted From HUF Taxation:

• If a family member has converted or transferred his self-acquired property into the joint family property without due consideration, the income from such property is not taxable in the family's hands.
• Income from an impartible estate (even if it belongs to a family) is taxable in the hands of the estate holder, not the HUF.
• Members' personal income cannot be considered HUF income.
• Because "Stridhan" is a woman's absolute property, any income derived from it is not taxable as HUF income.
• Even if the daughter's individual property is vested in the HUF, the income from such property is not taxable in the hands of the HUF.

The Act recognizes a HUF as a separate assessable entity. Its earnings can be assessed if the following two conditions are met:

• A copartnership should be established. In this regard, it's worth noting that once a joint family's income is determined to be that of a HUF, it stays that way in consecutive assessment years until coparceners demand partition.
• A joint family property should be established, consisting of ancestral property, property gained with the help of ancestral property, and property transferred by its members.

Please keep in mind that any property obtained by a daughter from the shared family property is hers solely. Any money derived from it is taxed in her hands only if she is an individual. This will also apply to any legal heir who acquires property as a descendant.