MC Explains | What is a Hindu Undivided Family?

Taxation works differently for individuals, companies, firms and other entities. One such entity is a Hindu Undivided Family (‘HUF’), which has its separate tax liabilities and exemptions.

HUF, as a concept in India, was created to ensure families stay together and the ropes of their businesses remains within the family. In today's time and age, families are still following this principle laid down ages ago. This would ensure that the wealth and control of a business remains within the embrace of the family.

An HUF is an emotion, which has now been given legal sanctity.

An overview of HUF and Karta

Hindu Undivided Family (HUF) is a not a creation of any codified law but only by practice, which has been treated as a separate ‘person’ under the provisions of the Income Tax Act, 1961 (IT Act).

HUF consists of individuals who have lineally descended from a common ancestor. A person gets a right in an HUF by birth as a co-parcener or by marriage as a member. It works on the ‘eldest first’ concept.

Karta usually is the eldest member of the family. Once the Karta passes away or retires, the eldest child (male or female) becomes the next Karta of the HUF, and the HUF will continue as usual, without distribution of any assets. Rest of the individuals who are born in the family will automatically become co-parceners of the HUF on birth. Any woman who is married to a co-parcener automatically becomes a member of the HUF by marriage. Women have rights in two HUFs -- their father's HUF as a co-parcener, and their husband's HUF as a member. To be sure, a co-parcener in its literal sense means a joint heir. Any individual born in an HUF automatically becomes a co-parcener.

However, husbands of female co-parceners do not get any rights in the wives’ parents’ HUF. There is no particular format of a family for the creation of an HUF, which can be set up in a joint family just the same as in a nuclear family. Further, it is not mandatory to have ancestral properties or inherited assets for the creation of an HUF.

Just like any other business entity, HUF can run its own business to generate income. It can also make investments separately in a similar manner as any other individual, including in real estate, precious metals, shares and mutual funds.

Benefits of HUF

There are various benefits attached to following the HUF system. These include:

Tax benefits

An HUF is a separate legal entity and thus enjoys a basic tax exemption. It is treated separately from its members and has its separate PAN card, creating a separate stream of income. A member of an HUF enjoys complete exemption from tax on any amount of income received from the HUF, where the sum has been paid out of the income of the HUF.

Loans & insurance benefits

An HUF can extend loans to its members as per the terms agreed upon. Moreover, an HUF can also avail of a home loan to purchase a residential property and get tax benefits up under Section 80C of the IT Act for loan repayment and for the interest to be paid thereon.

Individuals receive various exemptions on tax payments for their expenses throughout the year towards insurance policies and other investment instruments. Similar benefits are also applicable for an HUF. For example, an HUF can pay life insurance premium for its individual members and can claim tax benefits against the same under Section 80C of the IT Act.

Equity-linked payment schemes are some other investments that are eligible for tax exemptions under this section. Individuals can, through an HUF, claim a maximum amount of exemptions and deductions to the tune of approximately Rs 1.5 lakh under this Section of the IT Act.

Investments

An HUF is allowed to make investments in tax-saving fixed deposits and equity-linked savings schemes (ELSS) to earn tax benefits under Section 80C of the IT Act. While an HUF cannot open a Public Provident Fund (PPF) account in its name, it can claim tax deductions for the amount deposited by the HUF in respective PPF accounts of its members.

Having said that, while there are several benefits of creating an HUF, it is not free from its fair share of practical hurdles and difficulties. We’ll look at those in our next piece.