Taxation of HUF

Hindu Undivided Family (HUF) is defined as a separate tax entity that consists of individuals lineally descended from a common ancestor and includes their wives and unmarried daughters. HUF is recognized as a distinct assessable entity under the Income Tax Act, and it can earn income, own property, and incur liabilities in its own name. While the term “Hindu” historically referred to followers of Hinduism, in the legal context of HUF, it includes not just Hindus but also Buddhists, Jains, and Sikhs.

HUFs are taxed separately from their individual members. They have their own PAN (Permanent Account Number) and are required to file separate income tax returns. HUFs are subject to the same tax rates and slabs as individuals. The head of HUF is called ‘Karta,’ who manages the entire HUF business. The male members of the HUF are called co-parceners, and the female members are called members. Usually, the Karta is the eldest male member of the family. However, after a landmark judgment by a Delhi High court ruled that a female can be a Karta. However, no guidance given by income tax department on the same.

Taxation of HUFs:
HUF having its own PAN can claim basic exemption limit benefit of Rs.2,50,000 on its income.

Since HUF is a separate legal entity, it can run its own business, invest in its own name and can claim deductions of Chapter-VI as well in its own name.

HUFs can also own properties in its name. Since an Individual is allowed to have only two properties as self-occupied properties and have to pay tax if he has more than two properties, role of HUF comes into play in this case.

Let us understand this with an example.

Mr. Kumar has 3 House properties. Two of them are allowed to have as self occupied properties and on third property he will have to pay tax as per provisions applicable since the property will be a deemed let out property. Now, if Mr. Kumar forms an HUF alongwith other family members , then he may have the third property as a self occupied property in the name of his HUF.

For computing tax on HUFs income, normal provisions those applicable to resident individuals are also applied to HUFs. Income tax is calculated as per the slabs of income tax.

HUF on its own cannot receive salary as it is not an individual person able to take its own decision but its just a separate legal entity. This makes it clear that an HUF cannot file its return in ITR-1. As per provisions of Income Tax Act,1961 an HUF can file its return in ITR 2/3/4.

Following are certain shortlisted ways in which an HUF saves tax to an individual member:
Rental Income:
Rental income from a property can be received on behalf of an HUF instead of an individual account as discussed earlier to save tax.

Income from Business:
Profits generated out of the family business, in the name of a HUF, shall be taxed accordingly and exemptions will give more leverage on tax saving.

Salaries and Remuneration:
Karta and Members may get salaries and remuneration from HUFs which are allowed as a deduction while computing total income of the HUF.

Chapter VI and other Deductions:
Certain Chapter VI deductions are available to HUFs apart from in the individual names of the members.

Conclusion:
From the above information, we can be assured that HUF is definitely a tool to save tax in a legal way. An HUF is mostly treated like an individual itself having a separate legal entity and it files its separate income tax return. Though it is a tool to save tax, many a times it may happen that due to disputes in the family an HUF shall have to be dissolved and the process becomes a hassle. Hence, to avoid any legal complications one must determine his financial goal and then take the decision of forming an HUF or not.

About Author:
CA Chinmay Shirish Agate
Chinmay Agate is a Practicing Chartered Accountant having 4+ years of experience and expertise in the field of Direct Taxation and Auditing compliances. In the past, he worked in various CA firms and comes with wide industry experience from services, retail to manufacturing to trading where he has handled various complex assignments. He has keen interest in Forex and Derivative knowledge as well as fundamental analysis.