What is HUF or Hindu Undivided Family?
According to suitability, there are various ways of doing business in India, but the government has recognized that family businesses should also be regulated and incorporated. Hindu Undivided Family (HUF) is a way of doing family business in a very structured and legal manner, making it possible to reduce family disputes due to business in the long term. Let’s understand in detail what HUF is and how it works.
What is a HUF?
A simple concept in business is that you should treat yourself as separate from your business. By continuing the thought, the Hindu Undivided Family is a joint family considered a separate entity from the individual family members. The family generally holds assets that have been passed on from their ancestors. Assets also include a gift or a property purchased from the sale of joint family property.
How does it work?
There is a head of the family called “Karta”, who is the eldest member of the family and operates the business or whose consent is required to take material business-related decisions. All the members of the family are considered members of HUF. However, only male members of the HUF, called coparceners, can only demand the partition of the HUF. Female members of the HUF do not have such a right.
Conditions to be satisfied before forming a HUF
A primary reason for creating a HUF is to claim an additional tax deduction from income tax authorities. But, you need to satisfy the following conditions to create a HUF:
- It must be created by the family, which means all the members of HUF must have the same ancestors.
- Only Buddhist, Hindu, Sikh, and Jain communities can form a HUF.
- The assets of the HUF must come as a will, gift, or ancestral property.
- When you form a HUF, you must also create a bank account in the name of HUF. The deductions and exemptions of tax can be claimed only if the HUF’s bank account has made the transaction. It must be created using a PAN in the name of HUF.
- Division of corpus will be possible only in the case of male members of HUF coparceners.
Advantages of forming a HUF
There are various advantages of forming a HUF over incorporating other forms of businesses like company, partnership firms, LLP, etc. These advantages are as follows:
- You can claim a tax exemption limit of up to Rs 2,50,000, which is the basic exemption limit for individuals as well.
- You can invest the proceeds of businesses, and returns thereon will be eligible for claiming deduction if they are eligible for the same by the income tax act 1961, such as deductions under section 80C.
- You can own a residential house property in the name of HUF without paying tax on the same.
- You can avail of a home loan in the name of HUF by utilizing the credit score of your HUF.
- You can also claim a deduction of the premium paid toward health insurance in the name of any HUF member.
Disadvantages of HUF
When there is a positive side, there has to be a negative side as well. Here are a few disadvantages of forming HUF:
- New members can become members of HUF, but they cannot become coparceners by way of marriage. New members can become coparceners by birth.
- There will always be an unequal distribution of power as the Karta will have the supreme power in making decisions.
- Once tax returns are assessed as HUF, there is no going back. It will always be assessed as a HUF only until it gets dissolved.
Keeping all the advantages and disadvantages of HUF in your mind, you can decide whether you want to create a separate entity to save tax or not. It all depends on the type of business, family corporations, and current financial situation. It would help if you kept in mind that the Karta of the family should be aware of the property and financial transactions done by coparceners.
This blog is purely for educational purposes and not to be treated as personal advice. Mutual funds are subject to market risks, read all scheme-related documents carefully.
September 12, 2023
July 27, 2023