Hindu Undivided Family or HUF is a family that consists of persons who are lineal descendents of a common ancestor. HUF is considered as a separate legal entity for the purpose of taxation. An HUF can own assets, open bank account, earn income, file taxes and take tax-deductions like a regular person.

 

Due to its unique identity, HUF is also used as a tax-saving tool by many. The common narrative is to transfer income generating assets or business in the name of HUF, and easily reduce your own taxable income. But that is not the case entirely. Let us find out.

How it is started

 

An HUF is automatically created when a Hindu, Jain, Sikh or Buddhist couple gets married. However, if someone is serious about using the HUF and its benefits then they may create a legal HUF Deed on a stamp paper stating the names of its members. 

 

An HUF’s members consist of a ‘karta’ who is the eldest male member, some specified male and female members in the lineal line are called as ‘coparceners’ and the rest are called as ‘members’. We will not delve into the details as many legal precedents have modified who can and cannot be a karta/co-parcener or member. So let us move on to the financial aspect of the HUF.

Using HUF to save taxes

 

Once the HUF deed is created, a bank account and PAN card can be created for it. After that, the karta or its members tend to transfer their personally owned property into the HUF using a gift deed.

 

However, that is not the right decision from a tax saving perspective. According to Section 64(2) of the Income Tax Act 1961, 

 

(2) Where, in the case of an individual being a member of a Hindu undivided family, any property having been the separate property of the individual has……been converted by the individual into property belonging to the family……otherwise than for adequate consideration……for the purpose of computation of the total income…..(b) the income derived from the converted property or any part thereof shall be deemed to arise to the individual and not to the family ;

 

In other words, if self-acquired property of an individual is converted into joint family property without adequate consideration, the income derived by the joint family on account of such property shall be included in the total income of the individual who was the owner of such self-acquired property.

 

This is why you should NOT transfer personally owned property or money into the HUF. 

 

The other types of income that do not form part of HUF are:

 

1. Income from impartible estate is taxable in the hands of holder of estate and not in hands of HUF.

 

2. Personal income of the members cannot be treated as income of HUF.

 

3. Income from individual property of the daughter is not taxable in hands of HUF even if such property is vested into HUF by daughter.  

 

4. Stridhan i.e. woman’s gifts are the absolute property of a woman and any income arising out of it is not taxable as income of HUF.