The Indian Income Tax Act of 1961 allows for a unique type of taxpayer entity under Sec 2(31). In addition to individuals, non-profit organizations, and companies, it allows entire families to file an income tax return as a unit.
A Hindu Undivided Family (HUF) is a unique form of tax-paying entity in India. Any Indian resident belonging to Hinduism, Sikhism, Buddhism, or Jainism can form this type of entity.
Features of a HUF
- HUF is taxed separately from the coparceners or members of HUF. If Ramesh, his wife, and two children form a HUF, the family has to file five income tax returns (assuming that his wife and children have income).
- HUF has its own separate PAN card and is a different taxable entity than its members.
- HUF can buy, sell, and own assets.
- HUF can be the owner of a business.
- If the HUF makes investments, the returns are taxable in the hands of the HUF.
- HUF can hold a life insurance policy on its members.
- Every HUF has to be presided over by the head of the family, known as Karta. As of 2016, a woman is allowed to be a Karta after a court decision.
How Does HUF Help Tax Savings?
HUF helps tax savings in two ways.
- HUF is allowed to claim its own Sec 80(C) benefit, which adds ₹150,000 of tax-exempt income.
- Income from a property can be transferred to HUF.
Ramesh earns a salary of ₹25,00,000 every year. In addition, he receives ₹8,00,000 as income from property that he inherited from his father.
If Ramesh filed an individual tax return, he would be liable to pay tax on the income of ₹25 lakhs + ₹8 lakhs = ₹33 lakhs.
At most, he can claim a relief of ₹150,000 under Sec 80(C) and another ₹50,000 under Sec 80(CCD) for contributions to the National Pension Scheme.
His taxable income is ₹31 lakhs.
If he formed a HUF with his wife and children (even if they were not earning), he could transfer the ₹8 lakh income from property to the HUF.
His taxable income would be ₹23 lakhs, and the HUF would have a taxable income of ₹6.5 lakhs.
Basically, the Sec 80(C) can be claimed once more, allowing relief of ₹150,000.
Future of HUF
According to figures available from FY 2015-16, the last year for which such details are available, there were a million HUF filings with an income of ₹38,600 crores, and the tax paid was ₹3,065 crores.
This shows that an average HUF pays a tax rate of less than 10%.
However, if the HUF was dissolved, the tax rate of many of these families would jump to 30% (the tax rate applicable to income above ₹10 lakhs).
The Reform of Family Law consultation paper by the Law Commission has suggested that HUF be abolished. When it came into existence a century ago, the huge number of joint families made it necessary. Since it is used now solely as a tax-saving tool, there is no place for it in the new Direct Tax Code set to be unveiled soon.
