What is a HUF?

• 
  A family under Hindu law consisting of all persons lineally descended from a common ancestor.
• 
  It cannot be created under a contract.
  It is created automatically in a Hindu Family & comes into force as separate legal entity upon completion of certain formalities.
• 
  Recognised all over India except in Kerala.
  It can be formed by Jains, Sikhs and Buddhists as well

Who can form HUF?

• 
  Married Couple (or) Members of a joint family, at least one of who should be a male member.
  Single person cannot create HUF

Structure of HUF & Share of each person in HUF:

Architecture	Detail / Role	Right to claim partition	Share in HUF properties upon partition
KARTA (Note 1)	Senior-most member of the family Manages the affairs of the HUF	Yes	Equal share
COPARCENERS (Note 2)	A person in the family who acquires a right in the ancestral property by birth i.e. all lineal descendants of Karta including married daughters	Yes	Equal share
MEMBERS (Note 2)	Family members other than coparceners Eg. Spouse of the lineal descendants	No	No share but enjoys the HUF income

Note1: Post the 2005 amendment, the SC has also further ascertained that Hindu woman’s right to be a joint legal heir and inherit ancestral property on terms equal to male heirs. Hence, it could be debated that on the death of Male Karta, the Karta could be senior-most female coparcener as well.

Note 2: A married woman will be a coparcener in her father’s HUF and member in father-in-law’s HUF.

How to form an HUF?
• Documentation
Though HUF is automatically created in a Hindu family, the following documentation would be necessary for it to be recognised as ‘separate legal entity’ under income tax laws:


• Introduction of capital assets into HUF
A property can be introduced into the HUF in the following ways:

Method of introduction	Tax Implication
Partition of a larger HUF	No tax implication if the asset is not treated as self-acquired property.
Inheritance through a specific bequest under a will	Since this is not a ‘transfer’, there is no tax implication.
Reunion of separated coparceners	Tax implications depends on the type of assets introduced.
Receipt of gifts	HUF is not an individual and hence has no relatives. If the value of the assets received as gifts in a year exceeds INR 50,000 it will be deemed as income of the HUF and taxed accordingly.
Blending of individual property with the family hotchpotch	Income derived by HUF from such property shall be clubbed to the income of transferor. (Section 64(2) of the Income Tax Act, 1961).
Doing joint labour for the benefit of HUF	Income earned from such labour shall be appropriately taxed in the hands of HUF

Benefits of forming an HUF:



Disadvantages of forming an HUF:

Equal right in the property	Once a property is assigned to an HUF, all coparceners have equal right to it. So, it cannot be transferred or sold without the consent of all coparceners, and even the Karta cannot transfer it to anyone without everyone’s consent.
Breaking is not as easy as formation	HUF cannot be broken into parts; all members have to agree to dissolve an HUF
Every lineal descendant shall be a part of HUF	Since all lineal descendants are part of an HUF, every child, whether boy or girl, who gets added to the family, becomes a part of the HUF
Procedural Compliances	Since HUF is a separate legal entity, there is an additional burden of procedural compliances under IT Act. Further, the HUF shall be assessed and monitored by IT Authorities. The income pattern of an HUF is often questioned by income tax officers.
NRI Issues	HUFs are an Indian phenomenon; some family members move abroad either to study or work and the computation of income may be difficult as many countries do not recognize HUF. “The computation of income in such cases is still a grey area
Clubbing of income	While introducing assets into HUF or any other action pertaining to HUF, one has to be very careful about attracting clubbing provisions
Will	HUF property cannot be mentioned in the Will.

Taxability of HUF:

Particulars	Taxability
Separate legal entity	HUF has its own PAN Files separate tax returns Assessed in its own capacity
Rate of taxation	Same as applicable to a resident individual not being a senior citizen.
Income	HUF can have all types of income except salary income.
Returns on investments made from HUF’s income	Assessed in the hands of HUF
Deductions & exemptions	Eligible, if such deduction or exemption is technically allowed for a HUF.
Salary to HUF members	Allowed and deductible provided they contribute to the functioning of HUF.
Fees or remuneration derived by a member as director of a company or partner of a firm, in his representative capacity as member of HUF	Taxable as income of HUF
Clubbing provisions (Section 64(2))	Any personal funds or property given by an individual to the HUF will lead to clubbing of such income in the hands of the individual.

Illustration:

Let us understand the taxation with an example. After the death of Mr. A’s father, he decides to start a HUF with his wife, son, and daughter as members. Since Mr. A had no siblings, the property held by his father was transferred in the name of the HUF. The property earns an annual rent of INR 7.5 lakhs. Mr. A has an income from salary of INR 20 lakh. By creating a HUF, Mr. A can save tax as seen below.

Income from various sources	Income of Mr. A before formation of HUF		Income of Mr. A after formation of HUF		Income of HUF
Salary	20,00,000		20,00,000		–
Less: Standard deduction	50,000		50,000		–
Income from Salaries (A)	19,50,000		19,50,000		–
House property rent	7,50,000		–		7,50,000
Less: Standard deduction on house property	2,25,000		–		2,25,000
Income from house property (B)	5,25,000		–		5,25,000
Total taxable income (A+B)	24,75,000		19,50,000		5,25,000
Section 80C	1,50,000		1,50,000		1,50,000
Net taxable income	23,25,000		17,00,000		3,75,000
Tax payable (Tax + Cess)	5,30,400		3,35,400		6,500
Total tax paid by Mr. A & HUF				3,41,900
Tax saving due to forming an HUF				1,88,500




Tax Planning Strategies:
The following are some notable tax-planning options regarding HUF:





Ways to boost the property of an HUF:





Partition of HUF and taxability thereof:
Partition is the severance of the status of the Joint Hindu Family, known as HUF under tax laws.

Particulars	Explanation	Assessment under the Act (Sec 171)
Total Partition	All the members cease to be members of the HUF and all the properties cease to be properties belonging to the said HUF.	The Income under consideration till date of partition will be assessed as income of HUF and thereafter in the hands of individual’s coparceners after partition. If any recipient of income after partition forms another HUF with his wife and son/s then the income will be assessed in the hands of the new HUF.
Partial Partition	It may be partial vis-a-vis members, where some of the members go out on partition and other members continue to be the members of the family. It may be partial vis-a-vis properties where, some of the properties, are divided among the members other properties continue to be HUF properties. Partial partition may be partial vis-a-vis properties and members both.	In order to be acceptable or recognizable partition under section 171, a partition should be complete partition with respect to all members of HUF and in respect to all properties of HUF and also there should be actual division of property as per defined / specified shares allotted to each individual member of HUF property.
Death of coparcener	A death of a member / coparcener cannot bring about an automatic partition and on such a death, the other surviving members continue to remain joint. However, under the provisions of 56 of Hindu Succession Act, there is a deemed partition for a limited purpose of determining the share of the deceased co-parcener for the purpose of succession under the Act.




Conclusion:

Though the cons outweigh the pros, however, in certain scenarios it is worth taking the risk. The basic structure and the features of HUF make it a tax effective tool in the following scenarios:

• Taxpayers having both huge income under various heads of income and having moderate to high income from ancestral properties. If not for such income from ancestral property, they would either be under lower tax brackets or below the minimum taxable income and it is expected to remain the same in the long run.

• Taxpayers having higher amount of savings, which if split between individual and HUF could provide for higher deduction.

• If the members do not intend to split the ancestral property in the long run and want to continue holding it in the common pool, creating a HUF would be beneficial.

• Considering the present day’s scenario where the joint family system hardly exists, creating smaller HUFs by nuclear families (parents and children) which is formed with a specific objective like child’s education, securing child’s future, etc… will be beneficial.