what is huf in income tax

What is a HUF?

HUF means Hindu Undivided Family. You can save taxes by creating a family unit and pooling in assets to form a HUF. HUF is taxed separately from its members. A Hindu family can come together and form a HUF. Buddhists, Jains, and Sikhs can also form an HUF. HUF has its own PAN and files income tax return independent of its members. All individuals belonging to a Hindu family, including husbands, wives, children, their respective spouses, and their offspring, are eligible to be included in a HUF. In this structure, the male family members are referred to as coparceners, while the female family members are simply termed as members. The right to request a division of the HUF is exclusively reserved for coparceners.

HUF Account Rules – Features of Hindu Undivided Family (HUF)

• There are a few features of HUF account that makes it different from regular saving bank accounts.
• Every member of the family can deposit their income in the common corpus
• Single person’s authority while participation from entire family
• Tax benefits on deposits under various sections
• Corpus can be divided only on agreement of every coparcener of the fam

Documents required for opening HUF account:-

1. HUF will have a unique PAN card; this PAN card along with the PAN of Karta should be produced.
2. A declaration form will be provided where every member has to make a signature stating the name of Karta and declare
3. They are the only members of HUF
4. Karta to have sole authority over HUF account
5. Every transaction on behalf of HUF account, made by each member of the family is governed by Karta.
6. Residential proof of Karta
7. Identification proof of Karta
8. Apart from the points mentioned above there can be other documents or conditions depending on the bank where HUF account is opened.

How to Form or create HUF

Here are three simple steps to create a HUF:

• Step 1: Create HUF Deed Prepare the HUF Deed, which is a document that outlines the rules and guidelines of the HUF. It should include details of the Karta, coparceners, and other members of the family.
• Step 2: Apply for HUF PAN Card Obtain a PAN (Permanent Account Number) card for the HUF by applying to the Income Tax Department. The PAN card is essential for conducting financial transactions and filing tax returns on behalf of the HUF.
• Step 3: Open a Bank Account for the HUF Open a dedicated bank account in the name of the HUF. This account will be used to manage the financial transactions and funds of the HUF separately from individual members’ accounts.

Once these steps are completed, the HUF becomes a distinct legal entity. It can receive payments and hold assets in its name. Importantly, any income received by the HUF is taxed separately and not attributed to individual members of the HUF.

How to Save Taxes by Building A HUF? 

• The HUF has its own Permanent Account Number (PAN) and files a separate tax return.
• A separate joint Hindu family business is created, with the HUF being a distinct entity from its members.
• Deductions under Section 80 and other applicable exemptions can be claimed in the HUF’s income tax return.
• The HUF can take out insurance policies on the lives of its members.
• Members contributing to the functioning of the HUF can be paid a salary, which is then deductible from the HUF’s income.

What are HUF Tax Benefits?

Tax benefits are one of the major HUF advantages. These include:

• Tax deductions can be availed under section 80C for the HUF account.
• Gifts up to worth Rs 50,000 will be tax-free. A father who owns a HUF account can gift a property or money of higher worth to a son who owns a smaller HUF account. The gift should specifically be for the son’s HUF. In such instances, tax benefits under sections 64(2) and 56(2) can be enjoyed.
• Corpus can be used for investment in tax-free money instruments.