A Hindu Undivided Family (‘HUF’) is automatically formed at the time of marriage. All that is required to create a HUF is a KARTA and a MEMBER. The male person is Karta, also known as the head of the family, and his wife as a member of HUF. Any born / unborn child is a part of HUF and is a co-parcener in the HUF.
A reader may note that, for tax purposes, HUF has a legal identity of its own i.e. An HUF is a person assessed under the Income-tax Act separately than the individual. Any income generated from funds/property of HUF will be taxable in the hands of HUF. Thus, making it appealing for people to consider creating HUF.
However, before you think to create a HUF, you may go through the below-mentioned pros and cons and analyze. Please note that these are only the important points and the reader may scrutinize all aspects before making a decision.
- Separate identity. Separate PAN will be allotted to HUF
- Income tax slabs as applicable to an individual, are available to HUF also. So, any income earned by HUF will be taxable as per slab rates in the hands of HUF. Thus you get the benefit of the lower tax rate (i.e. in case that same income was taxed in Individual hands who may fall under a higher tax bracket)
- Any lineal ascendants/descendants of the person will be automatically a part of the HUF i.e. by way of being a coparcener or a member in the HUF
- Any ancestral property received and any income generated from it can be held under the HUF for a common pool of family
- Expenses can be incurred by HUF to run the household, thus utilizing the income earned by HUF / common funds lying with it. Simultaneously this will also help build capital in individual hands as they may not have to shell out funds from individual income
- Any coparcener can demand a partition, and the Karta shall have to distribute the assets of HUF. A member cannot demand partition of HUF, however, will be entitled to maintenance from HUF funds/property
- An individual can merge his property with the HUF. Once the individual property is transferred to HUF, the individual loses his right over the property. All members of the HUF have equal rights over the property. Once transferred, the property will be HUF property forever unless divided amongst its coparceners
- In case of income generated on capital invested by the Karta or any member or coparcener of HUF, clubbing provisions shall apply. In such a scenario, income will be taxed in the hands of the person introducing such capital in HUF
- HUF will have to maintain proper books of accounts and required documents as similar to that of individual
- HUF is helpful only if you are earning a high level of income. In the case of persons with income in lower slab rates, HUF may not be very beneficial