Hindu Undivided Family (HUF) consists of all persons directly descended from a common ancestor, and also the wives and daughters of the male descendants. For instance, you and your spouse along with your two children can create an HUF and get certain relaxation in computation of taxes.
The Hindu Undivided Family is treated as a ‘person’ under section 2(31) of the Income-tax Act, 1961, for the purpose of assessment under the Act. HUF has its own Permanent Account Number (PAN) and files tax returns independent of members.
An HUF consists of the ‘karta’, who is typically the eldest person or head of the family, while other family members are coparceners. The ‘karta’ manages the day-to-day affairs of the HUF. Children are coparceners of their father’s HUF. Once a daughter is married, she becomes a member of her husband’s HUF, while continuing to be a coparcener in her father’s HUF. Even though Jain and Sikh families are not governed by the Hindu law, they can also form HUFs.
How does forming an HUF help in tax-saving?
One can save on taxes by creating a family unit and pooling in assets to form an HUF. An HUF is taxed separately from its members, therefore, deductions (such as under Section 80) or exemptions allowed under tax laws can be claimed by it separately. It is usually used by families as a means to build assets.
Often families that own ancestral properties and businesses obtain a separate PAN in the name of the HUF. This is done so that the incomes earned from the assets and businesses owned by the HUF are assessed separately. This brings down the family’s tax liability, too. An HUF is taxed on the same rate as applicable to an individual income tax assessee. An HUF can also take an insurance policy on the life of its members.