Hindu Undivided Family (HUF) Act Advantages, Disadvantages and Features

Everything you need to know about creating a HUF and its positive or negative impact on income tax.

In India, the joint family system has long been prevalent and is also fairly appreciated. The unity among the family members, coupled with their keen desire to help one another brings out the beauty of this ageless concept. In line with the joint family, the concept of a Hindu Undivided Family has been introduced. In this blog, we learn all about it and discuss its key features, benefits, and disadvantages to better understand its implications on the income tax payable.

What is Hindu Undivided Family?

A Hindu Undivided Family, better known as HUF, essentially refers to a joint family which is considered as an entity separate from the individuals in the family. To better understand what is HUF, begin by knowing that citizens of India who belong to the Hindu ethnic community may decide to save a considerable amount of tax as a family by forming a Hindu Undivided Family meaning HUF.

In this case, the joint income earned by the family members of the HUF does not levy tax on those specific individuals but is collectively imposed as a whole on all the members of the family. The head of the HUF is the one who runs the family business and is referred to as the ‘Karta’ of the HUF. The family may have some ancestral property as an asset or a piece of property acquired by selling the joint family property. Alternatively, it may be a will, gift, or any property that has been donated commonly by the HUF members.

This asset can be secured from income tax imposition by forming a HUF and making a collective tax payment as a family, rather than paying tax individually by each family member. According to the HUF Act, all the members of a Hindu family are legally entitled to be a part of the HUF. These may include wife, children, as well as their wives and children. All male members of the HUF are referred to as coparceners, while the females are called members. Note that a partition of the HUF is only possible on the demand of a coparcener.

What is a Hindu Undivided Family (HUF) Account? 

As mentioned earlier in the blog, members of a Hindu family (particularly those in a family business or owing a joint property/asset) are authorised to come together and create a HUF account with the intention of tax saving. There are some rules, however, to create the HUF account, which are listed below.

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8 Key Features of a Hindu Undivided Family (HUF) Account

1. Only members of a Hindu family are entitled to create a HUF.
2. The HUF comprises a common ancestor and all his descendants, including wives and daughters.
3. HUF assets may include ancestral property, will, or gift.
4. Every coparcener of the family must agree to the division of the corpus among the family members.
5. For every new family member added to the family at the time of marriage, the HUF is automatically created.
6. Each family member can deposit his/her earned income into the common corpus pool.
7. After the creation of the HUF, a bank account must be created in the name of the family, after which a PAN number is generated in the HUF name.
8. Deposits made to the HUF are entitled to tax benefits under various sections of the Income Tax Act.

How to Create a HUF in 3 Simple Steps

A Hindu Undivided Family can easily form a HUF in 3 simple steps, which are listed below for your easy reference:

1. Create a HUF deed under the HUF Act
2. Apply for a PAN card in the name of the HUF
3. Create a bank account in the name of the HUF

The HUF is treated as a legal entity in the eyes of the law once the above steps are duly followed. Deposits can then be made by the HUF members into the account. Also, the amount deposited in the HUF account is not taxable to any individual member of the HUF.

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Advantages of Opening a HUF Account

There are some prime benefits to the members of the HUF once they open a common account. Some of these include:

1. Gifts received by the family up to a value of Rs. 50,000 is considered free of tax. Also, in case a father with a HUF account gifts a property or money of value higher than 50,000 to his son who owns a smaller HUF account, tax deductions under Sections 64(2) and 56(2) are applicable.
2. Section 80C under the ITA lists certain tax deductions for HUF accounts.
3. The corpus of a HUF can be used for investment purposes in various tax-free instruments.
4. The family head or Karta is authorised to sign all relevant documents on behalf of other members of the HUF.
5. HUF account members are entitled to avail of loan facilities.
6. They also have the right to make an adopted child a member of the HUF account.
7. Family members can create 2 PAN cards and also file tax returns separately.
8. HUF is recognised throughout India, barring the state of Kerala.

Disadvantages of the HUF Account

A HUF account has some challenges as well, some of which are listed below:

• Closing the account is much more difficult than opening one. Family partition may be the primary cause for the closure of the account, upon which, the family assets need to be evenly divided among each member of the HUF. This can sometimes be quite a tedious process, even adding to legal hassles on the way.
• Since every family member has equal rights to the family assets, the common family assets or property cannot be sold off without the consent of each member of the HUF. Also, the birth of new members or marriage results in more members being added to the family, further complicating such major decisions.

Summary

HUF can prove to be beneficial when it comes to saving tax or enjoying certain tax deductions under the Income Tax Act. However, like any other Act, the Hindu Undivided Family Act has its set of advantages and disadvantages both. It is important to consider both of them before entering into the HUF Act. Also, for more assistance on specific details of the Act in relation to income tax payment, visit PayBima. Here, you can get free access to the income tax calculator as well for ease of convenience.

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