The Hindu Undivided Family structure not preferred post curtailment of tax-saving aspects: Report

The Hindu Undivided Family (HUF) has long been a preferred entity for its provision of various tax-saving tools for assessees under the income tax (I-T) act. It has however lost popularity after the courts ruled that daughters are entitled to inheritance thus held, as per a Business Standard report.

Ashok Shah, partner at NA Shah Associates explained to the paper, “Wealthy families don’t prefer it now as the courts have ruled that daughters continue to be an equal partner of their father’s HUF even after marriage.”

“Many families prefer to give daughter their due share instead of including them in HUF. They fear that when a daughter continues to be a member, it can lead to legal complications such as the rights of her children in her father’s HUF,” he added.

But it is not only wealthy families but also middle-class ones that are moving away from HUF. The reason for this is the requirement of additional paperwork separate from individual filings, Arvind Rao of Arvind Rao & Associates told BS.

This includes acquiring a stamped deed formalising the HUF and opening a bank account with a linked permanent account number (PAN). Additionally, family members have to gift money or entrust an inheritance to the HUF to start the entity, the report pointed out.

The HUF provides various tax-saving tools such as the pooled tax on assets, which if bought/rented as the property of the HUF lowers the tax due. Businesses started under HUF also incur lower taxes. Thus while a member of the family would pay individual taxes, pooled assets receive additional deductions and/or exemptions under Section 80C, it added.

The HUF is also permitted to invest in life insurance or savings funds for members, but not in the public provident fund.

Despite the nomenclature, HUF is permitted for Hindus, Jains, Sikhs and Buddhists.

However, HUF is not exempt from the I-T clubbing provision – which asserts that an individual cannot divert funds to family to dodge tax due on the income. Thus, loans and not gifts are the preferred option.