Have you ever heard of the HUF concept i.e. Hindu Undivided Family and how it can help you save taxes?

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Well, an HUF typically comprises of the people lineally descended from a

common ancestor, it consists of their wives and unmarried daughters. The Hindu Undivided Family brings itself with various tax advantages but it does have some drawbacks as well. In this series on HUF, I will guide you to understand the HUF concept better which will help you optimise your tax savings to the fullest without getting in to any tax trouble.

Following are some of the main topics which I will be covering under this

exclusive series: -

Understanding the HUF concept!

What are the pre-requisites to form an HUF?

Creation and Recognition of HUF under Income Tax Act 1961!

Case study to explain the tax advantage of having an HUF!

How HUFs can help you save Taxes!

When is the income of an HUF becomes taxable?

Can HUF invest in Mutual funds, stocks or FDs?

How to form an HUF?

Disadvantages of HUF

When to form an HUF?

FAQs

1. Understanding the HUF concept

As the very literal name itself suggests, an HUF means a family consists of Hindus which also includes the Jains, Buddhists and Sikhs. The inception of HUF concept goes back to our early Hindu laws. An HUF gets automatically created on a person getting married. Besides, there could be other ways and formalities which can help you form your HUF, say by executing an

agreement on a stamp paper and transferring assets to your HUF. You also need to apply for a (PAN), Permanent Account Number and can open the HUF bank account. An HUF cannot be created under a contract, it is created automatically in a Hindu Family.

2. What are the pre-requisites to form an HUF?

For forming an HUF, you have to fulfill the following conditions: -

You need to have a family because, one person alone cannot form an HUF.

An HUF gets created automatically when you get married.

It includes the common ancestor and all the lineal descendants and their wives and unmarried daughters.

Typically, the assets can come to an HUF via a gift or a will or by any ancestral

property transferred to your HUF etc.

You need to formalise the HUF arrangement by preparing a legal deed which consists of members details and the business it runs.

You need to also apply for a PAN and a bank account, in the name of your HUF.

3. Creation and Recognition of HUF under Income Tax Act 1961

Can you really create an HUF, well, as said above, you can’t, in fact the whole concept of creating an HUF is confusing because HUF comes in to party right when a person gives birth. So it basically means that most of you must be having an HUF already by now, well the truth is totally different. The legal structure of your HUF will only exist in case your HUF has assets and generating income from the said assets. So, for making your HUF to become a

legal entity, you need to have PAN, Bank account etc and above all income in the hands of HUF.

4. Case study to explain the tax advantage of having an HUF

Let’s take an example of Manoj, who is going to receive a house property from his father as a gift or you can say on inheritance. Manoj has also recently formed an HUF along with his wife, two sons and a daughter as HUF members. Manoj does not have any brother or a sister so the property from his father will be transferred either in his name or his HUF’s name. The said property also fetches a monthly rental of 50000/- resulting in to an annual income of Rs. 6 lakhs. Manoj’s income from salary is approx Rs. 30 lakh, let us understand

how transferring the said property in his HUF’s name helps him save taxes which otherwise is not possible: -

As seen in the above case study, Manoj has saved Rs. 1.31 lakhs in taxes only because of transferring property received from his father to his HUF than in his individual name.

Important point to note here is that HUF is also allowed to claim section 80C deduction, so stay tunes for the next set of article in this series where I will be explaining what business can be done in HUF’s name, what investments it can make etc.

Till then, happy investing!

Rishabh Parakh is a chartered accountant and chief gardener of Money Plant Consultancy.

First Published:Sept 5, 2018 10:13 AM IST