All About HUF Creation, Taxability, Deduction A.Y.2022-23 & A.Y. 2023-24

All About HUF for A.Y.2022-23 & A.Y. 2023-24: When we talk about tax planning, a new legal and effective way suggested by Tax Consultants is the creation of HUF i.e. Hindu Undivided Family.  In India, many people have a joint family and also a joint income, so as it is a joint income it cannot be taxed in the hands of any specific individual.  Therefore it is taxed in the hands of the whole family separately. There is separate taxation for HUF and its members.  HUFs can also be formed by Buddhists, Jains, and Sikhs. When it comes to tax planning, you can take advantage of the HUF.

What is HUF?

A HUF is a separate legal entity. Through its Karta, it can own property, sell property, earn income, and enter into contracts with others. A HUF’s members (including daughters) are also called coparceners.

It is usually the father of the family or the senior most male member of the family who manages the family’s property since membership to the family is restricted to those who are born into it.

Tax deductions and exemptions can be claimed by a HUF separately from the members since the HUF is taxed separately. HUF and its members can claim deductions separately, such as 80C.

How to Create HUF? 

When a Hindu gets married, a Hindu Undivided Family is automatically created. HUFs are not required to be registered under any act, but it is recommended to form a Deed to govern them. Don’t forget to include the names of the HUF, Karta, co-coparceners, and its members. A HUF consists of a Karta, members, and co-parceners. A Hindu male with his wife and children automatically constitutes the HUF. A new HUF come into existence in different ways, some of them are as under:

• Partition
• Marriage
• Reunion

Basic Requirements for Existence of HUF

• Only One person/coparcener/member cannot form a HUF. As its name denotes the Hindu Undivided Family thats why a single person, male or female, does not constitute a family. Once the coparcener/member/person marries, a HUF comes into existence.
• The joint Family continues even in the hands of females after the death of the sole male member.

HUF Income Tax File

Open a bank account with the name of a Hindu undivided family by making HUF Dead.

1. HUF Deed: It is a simple format where HUF members agreed to form a Hindu Divided Family by signing on it. Please download the format here.
2. Apply for a HUF PAN Card: As you, all know HUF has its own identity. It is different entity from its members. So It requires a separate Income Tax File. To make its separate income tax file, it requires PAN. You can apply for HUF PAN by filing Form 49A offline or online. If you want to apply for PAN offline go to this link. Apply HUF PAN Online
3. Opening HUF Bank Account: While opening a Bank account in the name of HUF-banks always ask for a rectangular stamp which states the name of HUF and also Karta who is signing it. A round stamp is not accepted as per RBI guidelines.
4. Transfer Assets to HUF: Now transfer money by gifts to HUF capital keeping in view clubbing provisions and tax on gifts under the income tax act. And in this way, HUF capital is created.

HUF Tax Benefits

Following are the tax benefits available to HUF:

1. HUF can avail basic exemption of Rs. 2,50,000. (The tax rebate u/s 87A is not allowable in the case of resident individual assessees only.)
2. Gifts that you receive up to Rs. 50,000 are exempt under a HUF and for gifts of higher amount tax benefit could be taken in the way that father who owns HUF has given such gift to his son and can avail exemption under section 64(2) and section 56(2).
3. Deductions under section 80D for paying a medical premium.
4. Deductions under section 80DD up to Rs. 50,000 can be claimed for medical expenses incurred, expenses incurred on training, and rehabilitation of a disabled member of a HUF.
5. Deductions under section 80C can also be claimed by HUF. This section enables HUF to invest the income earned in any of the permissible securities under section 80C like PPF, NSC etc.
6. Investments can be made from HUF’s income. Returns from these investments are taxable in the hands of HUF.
7. HUF can pay salaries to its members if they are working in a joint Hindu family business. The salary paid can be claimed as an expense from the income of HUF
8. Rental income from a property and Business income could be transferred to HUF and taxed accordingly.
9. HUF can donate to recognized charity trusts and claim deduction under 80G and also claim a deduction for interest on the self-occupied property of Rs. 1,50,000 under section 24 of the Income tax act.
10. Income from mutual funds or shares and long-term gain on listed securities received are also exempt.

Incomes Which cannot be taxed as income of HUF

1. The personal income of the members cannot be treated as the income of HUF
2. ‘Stridhan’ which is an absolute property of a woman cannot be taxable as income of HUF.
3. Income of individual property of daughter is not taxable in hands of HUF even such property is transferred to HUF daughter.
4. Income from the property transferred by a member to HUF is self-acquired without receiving proper sale consideration.

Important Points Related to HUF

1. HUF has its own PAN and files a separate tax return.
2. HUF is taxed at the same rate as individuals.
3. HUF can receive gifts up to Rs. 50,000 only from strangers but from bigger HUFs (HUF of Father) HUF can receive any amount of gifts.
4. The greatest disadvantage of opening a HUF is that its members have equal rights on the property. That means the property cannot be sold without the consent of all members.
5. The tax rebate u/s 87A is not allowable in the case of resident individual assessees only.

Tax Planning with HUFs

HUFs have been used as a very effective means of tax planning.

• Since HUF is deemed to be a distinct entity, it is widely prevalent to transfer certain sources of income into the hands of HUF and small HUFs of the sons, in a legal manner.
• Thereby more assessees are created to divide the tax burden.
• HUF funds may be invested in any source of income such as shares, securities, share in partnership (through Karta), house property, etc.
• Deductions from the gross total income of HUF are available as in the case of an individual generally.
• In the case of a non-assessee with no HUF files, a HUF file can be created by accepting gifts from outsiders to the HUF.