HUF Income Tax Provisions 

An HUF is a family which consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. An HUF cannot be created under a contract, it is created automatically in a Hindu Family.

under section 2(31) of the Income-tax Act, 1961 Hindu Undivided Family (‘HUF’) is treated as a ‘person’. It's a separate entity for the purpose of assessment under the Act.

How to create HUF

HUF is formed by creating a deed between the Members of the Family. This deed should state the names of the karta (head of the family) and other members. It should also specify the property/assets that are being contributed to the HUF. The deed needs to be executed on stamp paper in accordance with the Stamp Act of the respective state. Register the HUF deed at the local sub-registrar office.

On the Basis of notarised deed, an application for PAN is filed in form 49A & on the basis of deed & PAN card a bank is open on the name of HUF.

After the creation of the HUF, open a separate bank account in the name of the HUF. Provide the bank with a copy of the HUF deed, PAN card of the HUF, and photographs of the karta and other members.

Taxability of HUF

An HUF is treated as a separate tax entity distinct from its individual members. It has its own PAN (Permanent Account Number) for filing income tax returns. In order to compute the income of an HUF, one has to first ascertain its income under the different heads of income. The following points should be keep in mind while computing income:

• If funds of an HUF are invested in a company or a firm, fees or remuneration received by the member as a director or a partner in the company or firm may be treated as income of the family (if fees or remuneration is earned essentially as a result of investment of funds).
  
  
• However, if fees or remuneration is earned for services rendered by the member in his personal capacity, it will be treated as the personal income of the member.
  
  
• If any remuneration is paid by the HUF to the karta or any other member for services rendered by him, remuneration is deductible from income of HUF if such payment is genuine and not excessive and paid under a valid and bona fide agreement.  

What in case Karta Transfer money to HUF Account

The money transferred by the Karta of the HUF may either be treated as:

1. loan if the same is intended to be repaid or
2. Gift if the money is not intended to repaid. 

As per Section 56(2) any gift received from specified relatives is tax free in the hands of the recipient. A member of the HUF is treated as relative of the HUF hence there is no tax implication at the time of the receipt of the money for HUF.

However, due to the clubbing provision income earned by the HUF on the money gifted by its Karta will be treated as income of the Karta and will be added to his income year after year. The clubbing provisions will apply till the assets of the HUF are fully partitioned.

Tax Exemptions and Deductions

HUF being an independent legal entity is treated separately from its members and has its separate PAN card, creating a separate stream of income. It enjoys basic tax exemption limit like an individual. A member of an HUF enjoys complete tax exemption on any amount of income received from business done by the HUF as the same is taxable in the hands of the HUF. Moreover, deductions u/s 80C, 80D, 80DD, 80DDB, and 80TTA can be enjoyed by the HUF.

Similar to individuals, even HUF can invest in insurance policies and other investment instruments and avail exemptions on payment towards such policies through the year. For instance, an HUF may pay premium on insurance policies for its members and claim benefits for the same. The amount of deductions that can be claimed by HUF independently, being a maximum of Rs. 1.5 Lakhs under Section 80C of the Act.

An HUF is allowed to make investments in Tax Saving Fixed Deposits and Equity Linked Savings Scheme to earn tax benefits under Section 80C of the Act. Although, an HUF cannot hold a PPF Account in its own name, it can avail tax deductions for the amount deposited by the HUF in PPF Accounts of its members on their behalf.

Rate of Tax

• An HUF is taxed on same slab rates which are applicable to an Individual.
  
• An HUF is liable to pay Alternate Minimum Tax if the tax payable is less than 18.5 percent (including cess and surcharge) of "Adjusted Total Income" subject to prescribed conditions.

Advantages of HUF

• Distinct Legal Status - One of the most significant advantages of HUF is that it enjoys a separate legal status. This results in the allocation of a unique PAN number for the HUF, allowing it to file income tax returns independently.
  
  
• Deduction of Life Insurance Premium - The premiums paid for life insurance policies of any HUF member can be claimed as deductions, reducing the taxable income of the HUF.
  
  
• Business Expenses Deduction - If an HUF is involved in business activities, all expenses related to the business, including salaries paid to family members working for the business, are deductible from the business income.
  
  
• Taxation at Individual Rates - HUFs are taxed at the same rates as those applicable to individuals, which can be advantageous in tax planning.

Disadvantages of HUF

• Equal Rights of Members - One of the significant disadvantages of creating an HUF is that its members have equal rights to the property. This means that any property cannot be sold or disposed of without the unanimous consent of all the HUF members. Over time, as the family grows through births or marriages, the HUF can become difficult to manage due to the increasing number of members.
  
  
• Partition - Dissolving an HUF is no simple task. Under the law, the only way to dissolve an HUF is through partition. In a partition, assets are distributed to members, which can result in considerable legal complications and disputes.
  
  
• Decreasing Relevance - Although the HUF is recognized as a separate taxable entity by the Income Tax Act, its relevance in today’s society, where nuclear families are more common, is diminishing. Family disputes, differences in the opinions of family members, and societal changes have led to a decline in the utility of HUF as a tax-saving vehicle.

Partition of HUF

If any partition takes place in HUF, there should be complete partition of huf. Partial partition of huf is not recognised by income tax act.

On partition of HUF the mother i.e wife of Karta takes a share equal to the sons and daughter. however he can mutually decide to take unequal share. As per section 47 of income tax act, no capital gain shall arise to huf on distribution of assets on partition of huf. Coparceners are only allowed to claim partition of huf.  

Assessment of HUF

An HUF is recognized as a separate assessable entity under the Act. Its income may be assessed if following two conditions are satisfied

• There should be a coparcenership. In this connection, it is worthwhile to mention that once a joint family income is assessed as that of HUF, it continues to be assessed as such in subsequent assessment years till partition is claimed by coparceners.
  
  
• There should be a joint family property which consists of ancestral property, property acquired with the aid of ancestral property and property transferred by its members.

Ancestral Property - Ancestral property may be defined as the property which a man inherits from any of his three immediate male ancestors, i.e. his father, grandfather and great grandfather. Therefore, property inherited from any other relation is not treated as ancestral property

Gifts Provisions

HUF cannot make any gift of huf property to any coparcener or any other person. Any gifts made by huf are void ab initio. However the Karta of an huf has power to gift out of joint family property for certain approved purpose provided that gift amount is reasonable .