What is Hindu Undivided Family?

  • HUF is neither the creation of law nor of contract
  • But HUF has not been defined under the Income Tax Act as it could be well derived under Hindu Law
  • Tax is payable by every person, u/s 4 of the Income Tax Act, 1961
  • The term ‘Person’ defined u/s 2(31)(ii) of the IT Act, 1961 includes a Hindu Undivided Family.

Elements of HUF

Hindu Undivided Family consists of a common ancestor and all his lineal descendants together with their wives and unmarried daughters.






How HUF can be formed

  • Husband + Wife = HUF. But HUF income will not be assessed separately since the wife can become a member only, not a coparcener. Members have equal rights but cannot demand partition.
  • Husband + Wife + Children = HUF which will be assessed separately in Income tax.
  • HUF need not consist of two male members. E.g. HUF of father will continue after his death with the son as Karta.
  • Blending of coparcener property into HUF Hotchpots with adequate consideration.
  • Creation of HUF by inheritance by making WILL in favour of HUF.
  • Creation of HUF by partition of larger HUF.
  • A Gift specifically given to HUF can form HUF and Husband & wife can constitute HUF. Presence of a minimum of two male members is not mandatory. (The Supreme Court in Pushpa Devi v. CIT 109 ITR 730 (SC) has held that a HUF can accept gifts from a person who is not a coparcener) In C.N. Arunachala Mudaliar v. C.A. Muruganatha Mudaliar [1954] SCR 243, it was held that the court would have to collect the intention of the donor in accordance with the well-known canons of construction

Process to form a HUF entity

  • Create HUF Deed with element
    • ● Formal documents on stamp paper
    • ● Name of Karta and Coparcener
    • ● Name of Members
    • ● Name of HUF like Kalpesh Patel (HUF)
    • ● Corpus/capital of HUF.
  • Apply for PAN Card
  • Open Bank Account in the name of HUF.
  • File Income tax return of HUF.

Residential Status of HUF

  • ★ Resident - When control and management of affairs of HUF are wholly or partly situated in India
  • ★ Non Resident - When control and management of affairs of HUF are wholly outside India

Income Tax Return of HUF

  • If income exceeds the basic exemption limit – required to file ITR
  • HUF can earn various income same as individuals like
    • ● Business income,
    • ● Rent
    • ● Agriculture income, interest income, dividend etc.
    • ● Capital gain on sale of property
    • ● Income should arise on the investment of HUF Funds.
  • HUF cannot earn salary because salary is paid in individual capacity.

Expenses/Deductions under Income tax

  • Reasonable and bonafide remuneration paid to Karta
  • Reasonable and bonafide remuneration paid to Member
  • Repayment of interest on residential loan
  • Standard deduction of 30% against rental income
  • Business expenses against business income
  • HUF can take advantage of 44AD
  • HUF can receive gifts from members exceeding Rs. 50,000/ without any liability to pay tax.
  • Any sum received by coparcener from HUF is exempt u/s 10(2)
  • Deductions under chapter VIA
  1. Insurance policy
  2. Mediclaim
  3. Medical treatment of dependent
  4. Donations to charitable institutions
  5. Deductions for saving a/c interest

Benefits of HUF Formation

  • Taxpayers can save tax in legal manner.
  • Enjoy benefit of basic exemption limit
  • Deduction also available under Chapter VIA
  • HUF can have a separate demat account
  • HUF can invest in shares and Mutual funds.
  • HUF can give loan to Members
  • The sum received by a member on partition towards his share as coparcener is not taxable as income. [Smt. Sudha V. Iyer Vs ITO 15 Taxmann.com 234 (ITATMum)(2011)

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