A Hindu Undivided Family (HUF) is treated as a separate taxpayer under income tax law. It has its own PAN, its own basic exemption limit and its own deductions. That is why, used properly, it can reduce a family's overall tax.
Who can form an HUF
An HUF arises in Hindu, Jain, Sikh and Buddhist families. It consists of a common ancestor and lineal descendants, with their wives and unmarried daughters. Since 2005, daughters are coparceners with the same rights as sons. The senior member who manages the HUF is the Karta.
Setting one up
- A declaration or deed recording the HUF, its Karta and members
- A PAN in the HUF's name
- A bank account in the HUF's name, operated by the Karta
- An initial corpus, typically from gifts or ancestral assets
How the HUF is taxed
The HUF files its own return and can choose either the old or new regime. Under the old regime it can claim deductions such as 80C and 80D in its own right. Income from assets genuinely owned by the HUF is taxed in its hands, not in the members' hands.
The rule that decides whether it works
If a member transfers their own property to the HUF without adequate consideration, income from that property is generally clubbed back with the member's income. So the source of the HUF's assets matters. Gifts from relatives outside the HUF, ancestral property and inheritance are the usual ways an HUF builds income that is taxed separately.
Things to plan for
- Members can receive money from the HUF, but tax treatment depends on whether it is a partition or a gift
- Partition, total or partial, needs careful documentation for tax to recognise it
- An HUF continues until it is partitioned, so it is a long-term commitment
An HUF is a useful tool, not a shortcut. A short review of your family's assets will show whether it is worth setting up.
This article is general information, not advice for your situation. Tax rules change, so speak to us before acting on it.