What is Hindu Undivided Family (HUF): Meaning & Income Tax Benefits

The hindu undivided family is a unique feature of India’s taxation system that allows families to collectively manage their income and assets under a single legal entity. Recognised under Hindu law, a huf helps optimise tax liabilities and efficiently manage family finances. In the financial year 2022-23 alone, 875,948 HUFs availed income tax benefits amounting to ₹3,802.86 crore. This highlights the growing popularity of HUFs as a valuable tool for tax planning. This article provides a concise guide to understanding what is huf, how it operates, and the tax advantages it offers. Whether you're planning to establish a HUF or considering its potential for tax savings, this guide will provide you with essential insights. By examining its legal framework and financial benefits, this article will help you decide if a huf is the right choice for your family.

What is Hindu Undivided Family?

The HUF full form is Hindu Undivided Family, which refers to a legal entity that allows family members to pool assets together for tax benefits. It offers tax-saving opportunities as it is taxed independently from its members. While primarily formed by Hindus, Buddhists, Jains, and Sikhs can also create an HUF. Each HUF is required to file tax returns separately, making it eligible for distinct tax exemptions. Members of an HUF are called coparceners, who are closely related to the family head (Karta). They acquire rights to the family property by birth and can manage, transfer, or partition it. Historically, only males were considered coparceners, but since 2005, daughters have equal coparcenary rights, allowing them to claim a share and request a partition of assets.

How to make HUF?

Refer to the steps below to create a HUF with your family and ensure all requirements are met to establish it as a legal entity:

• Begin by drafting an hindu undivided family deed, a formal document prepared on stamped paper, which serves as a declaration of the HUF's formation. This deed should detail all the assets and properties belonging to the HUF.
• The huf deed must specify the Karta, who is the eldest member and acts as the head of the hindu undivided family. It should also include the names of all coparceners, who are the family members participating in the HUF.
• After completing the deed, register the HUF and proceed to apply for a PAN card in the name of the HUF. Additionally, open a dedicated huf bank account to manage the entity's financial transactions. An HUF can only be formed by families from Hindu, Jain, Buddhist, and Sikh communities. Additionally, it is necessary for the family to be a joint one, where assets are shared. For registration, you will need to submit identity proof (such as PAN or Aadhaar cards) and photographs for each member of the HUF.

Top 5 Income Tax Benefits of HUF

Forming a huf can be an effective way to organise family assets and take advantage of legal and financial opportunities. The given below are a few key huf tax benefits:

1. Income Tax Exemption

Hindu undivided families enjoy tax exemptions on income up to ₹2.5 lakhs in the old tax regime and ₹3 lakhs in the new regime under Section 115 BAC of the Income Tax Act, 1961. The tax slabs for HUFs are the same as for individuals, but they have distinct income thresholds and tax calculations. These exemptions provide significant relief, reducing the overall tax burden. The provisions of the Income Tax Act govern these benefits, ensuring HUFs can optimise their tax planning effectively.

2. Owing a House

Under current income tax rules, if you own multiple self-occupied properties, only one can be classified as such, and the others will be taxed on notional rent. However, an hindu undivided family can own more than one residential property without facing this tax burden. Moreover, an HUF is eligible to take out a home loan for purchasing property and claim tax benefits. Under Section 80C of the Income Tax Act, it can receive deductions of up to ₹1.5 lakh for principal repayment and ₹2 lakh for interest paid on the loan.

3. Health Insurance

You can avail of a tax deduction of ₹25,000 per year under Section 80D for health insurance premiums paid for your family. However, as premiums continue to rise, this limit might not provide enough coverage for your family’s needs. This is where a HUF can be beneficial. Through an HUF, you can claim an additional deduction of up to ₹25,000 for premiums paid for its members. For senior citizens, this deduction increases to ₹50,000, helping you manage healthcare expenses more effectively.

4. Investments

An HUF can invest in tax-saving Fixed Deposits and Equity Linked Savings Schemes (ELSS) to claim tax benefits of up to ₹1.5 lakh under Section 80C. Although an HUF cannot directly open a Public Provident Fund (PPF) account in its name, it can still benefit from deductions for contributions made to its members' PPF accounts. These investment options provide significant opportunities for tax savings, helping a HUF optimise its financial planning.

5. Life Insurance

Under Section 80D, you can claim a deduction of ₹25,000 annually for health insurance premiums paid for your family. With rising premiums, this amount might not be sufficient to provide adequate coverage. This is where a hindu undivided family can be beneficial, as it allows an additional tax deduction of up to ₹25,000 for premiums paid on behalf of the HUF's members. For senior citizens, this limit increases to ₹50,000, ensuring better coverage and higher tax advantages.

Role of Marriage and its Influence on HUF

When a male member of a HUF gets married, his wife becomes a member of the hindu undivided family but does not gain coparcenary rights, as these are limited to direct descendants of the family within four generations. As a result, she cannot demand partition or claim a separate share in the huf property. Any children born to the couple automatically inherit coparcenary rights in the HUF. Similarly, when a daughter marries, she remains a coparcener in her father’s hindu undivided family while simultaneously becoming a member of her husband’s HUF.

Secure Your HUF’s Future with Covrzy Insurance Solutions

Protecting a HUF’s future involves planning for unexpected events, and Covrzy’s insurance solutions make this easier. Policies like Personal Accident Cover help protect family members from financial strain caused by accidents or injuries, especially when a key member’s health or income is vital. With Covrzy’s coverage, HUFs can ensure their financial security, even in challenging circumstances. We offer insurance plans that address the unique needs of HUFs, helping to mitigate risks and focus on wealth growth. By adding coverage to your huf’s financial strategy, you ensure the protection of all members and family assets.

Conclusion

A hindu undivided family provides a structured approach to managing family wealth and assets, promoting collective financial growth and security. It allows families to navigate legal and tax aspects more effectively, ensuring that resources are shared and protected across generations. Understanding the fundamentals of an huf empowers families to make informed financial decisions with confidence. For added protection, Covrzy offers insurance solutions that help secure your HUF’s future. With comprehensive coverage, you can safeguard your family members and assets. Reach out to Covrzy today to learn how our insurance plans can provide peace of mind for your huf stability.