How to Form a Hindu Undivided Family (HUF)?- A Way To Save Tax

HUF, or Hindu Undivided Family, is a very effective and legal technique to save tax that chartered accountants recommend. There are many undivided households in India, and the incomes received by such families are joint income rather than individual income.

Because these are joint incomes rather than individual incomes, they cannot be taxed in the hands of a single person and must instead be taxed in the hands of the entire family. Because these are taxed in the hands of the family, the family has its PAN card, as opposed to individual members of the HUF who have their PAN card.

Reason Behind Forming a HUF

The main reason for joining a HUF to save money on taxes is to lawfully obtain an extra PAN card. Because the Family’s income is not taxable in the hands of anyone individual, the HUF is given a new PAN Card, and the Family pays taxes using this PAN Card.

Because a new PAN Card will be issued to the entire family, it will also benefit from Income Tax Slab Rates, which means that income will be tax-free up to certain limitations before being taxed progressively at 10%, 20%, and 30%, resulting in tax savings.

With the help of an example, it will become evident how setting a Hindu Undivided Family Account would result in tax savings. Assume a family of four consists of a husband, wife, and two children. The husband’s income is Rs. 25 lakhs, while the wife’s income is Rs. 18 lakhs. They also have an ancestral property from which they earn Rs. 8 lakhs in rent every year.

The rent from such a property would be taxed in either the Husband’s or the Wife’s hands, or both.

Case 1: If taxed in the husband’s hands, the husband, who is currently in the 30% Income Tax Slab, would be forced to pay 30% of Rs. 8 lakhs, or Rs. 2.4 lakhs in tax.

Case 2: If taxed in the hands of the wife, the wife, who is currently in the 30% Income Tax Slab, would be forced to pay 30% of Rs. 8 lakhs in tax, or Rs. 2.4 lakhs.

Case 3: If both Husband and Wife were taxed equally, i.e. Rs. 4 Lakhs each, both Husband and Wife would be obliged to pay tax at 30% on Rs. 4 Lakh = 1.2 Lakhs each, resulting in a total tax outflow of Rs. 2.4 Lakhs.

However, there is a more effective way to plan your income tax. Because this income is derived from an asset that belongs to the entire family, it will be taxed in the hands of the family (if a HUF is constituted) and you will be eligible for slab rates.

Case 4: If this Rs. 8 lakhs in rental income is taxed in the hands of a HUF, the tax due by the HUF based on the Slab Rates would be between Rs. 70,000 and Rs. 80,000. (depending on the income tax deductions claimed by the HUF)

Taxing this Rental Income in the hands of the HUF would save Rs. 1,80,000 per year (Rs. 2,40,000 – Rs. 60,000).

We explained the notion in this post using simply Rental Income, but many other incomes accrue to the family as a whole, and the concept of saving taxes by forming a HUF can be applied to them as well.

Advantages of Forming a HUF

The main benefit of establishing a Hindu Undivided Family Account is that the family receives an additional PAN card and can split the family income, resulting in tax savings and a lower tax bill. This is one of the main reasons why CAs urge their clients to form a HUF to save up to Rs. 1.8 lakhs in taxes each year.

Disadvantages of Forming a HUF

It should be emphasised that there is a drawback, which is that all assets held in the name of the Hindu Undivided Family belong to the family as a whole, rather than to a single individual. The Hindu Undivided Family’s assets belong to all members of the family (including an unborn child in the womb of a mother).

As a result, extreme caution should be exercised when gifting assets to the Hindu Undivided Family, as the entire family will have a stake in the family’s assets, however, if the assets were in the name of a single individual, that individual would have sole ownership of the asset.

Points to Remember

HUFs, like individuals, are required to submit an Income Tax Return every year, and if the HUF’s business revenue exceeds Rs. 25 lakhs/ Rs. 1 crore, a tax audit under Section 44AB is also required to be done by a Chartered Accountant.

The deadline for filing the HUF’s Income Tax Return is July 31st of the Assessment Year. If a tax audit is required, the due date for filing the return is September 30th.

The HUF’s Karta has the authority to sign all documents on the HUF’s behalf. He may, however, grant this authority to other adult members.

Although an adopted child can join the HUF, he cannot become a co-parcener. The only distinction between a member and a co-parcener is that a member cannot request that the HUF be partitioned.

Depending on where the HUF’s control is located in India, the HUF may be a resident or non-resident.