What is Hindu Undivided Family (HUF): Meaning & Formation Explained

The Hindu Undivided Family (HUF) is a separate tax entity in India for its tax-saving purposes. It is often regarded as an excellent choice for joint families in India for effective management of assets, income, and taxes.

Besides, it ensures a structured approach towards financial planning and succession. This distinct legal entity helps in preserving family wealth and simplifies financial matters for larger households.

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What is an HUF or Hindu Undivided Family?

A HUF or Hindu Undivided Family is a separate tax entity under the Income Tax Act in India. It helps in saving income taxes by creating a HUF in India and levies taxes separately from its members.

In Hindu Law, a HUF comprises lineal descendants from a common ancestor that includes their wives and unmarried daughters as well.

What Does an HUF Consist of?

A Hindu Undivided Family can typically include members from three generations of a family. Therefore, it consists of:

Karta: Karta refers to the eldest member of the family who makes all the decisions on behalf of the family members and who has the right to do everything for the family.
Co-Parceners: A co-parcener is an individual who possesses the right to claim the share of the family's property if they decide to separate from the family taking his/her share. Generally, co-parcener can extend up to 4 degrees of the family hierarchy which includes:
- First Degree: Holder of ancestral property
- Second Degree: Sons and daughters of the first holder
- Third Degree: Grandsons
- Fourth Degree: Great grandsons

What is the Role of Women in HUF?

Women hold crucial rights in the HUFs of both families, parents, and husbands. Daughters become legal co-parceners in their fathers' HUF since their birth, like sons. Eventually, they have the same duties and rights in the HUF, just like sons. This means that they can claim their share of HUF property.

Therefore, they can continue to be co-parceners of their father's HUF after their marriage as well as their husbands. These rights of daughters are protected by the amendment in the Hindu Succession Act of 2005. Before this act, daughters could only become members of a HUF, but not co-parceners. However, women joining a HUF through matrimony are only eligible as members, not as co-parceners.

What is the Importance of Forming an HUF?

According to the Income Tax Law, Hindu Undivided Families act as a separate entity in India that offers additional tax benefits to a family. These benefits allow members of the HUF to have tax deductions.

As a HUF is subject to independent taxation separately from its members, it is eligible to assert its income tax deductions. This enables rebates and other benefits under Section 80C. This also enables claiming deductions under Section 54, Section 54B, Section 54D, Section 54EC, Section 54F, Section 54G, and Section 47.

What Are the Features of HUF?

Some of the important features of HUF include:

Formation: A HUF should include at least two related family members. Some business, assets, or ancestral property should be involved in this.
Control: There should be one person in control of the process, who is known as the “Karta”. While he/she can consult the coparceners about making a decision, the end decision will belong to the karta and will be legally binding.
Liability: The coparceners have limited liability, that is, the liability only of their own share of the property. Only the Karta will have unlimited liability in an HUF.
Continuity: An HUF can have a perpetual continuity. With the death of a Karta, the next eldest member of the family becomes the Karta. The HUF can be dissolved if all the members agree.

How to Form a HUF (Hindu Undivided Family)?

A Hindu Undivided Family cannot be formed under a contract but should be formed automatically in a Hindu family. Here are a few steps that can be followed for setting up an HUF:

Step 1: Creation of HUF Deed

You need to create a deed for an HUF. It is created on a legal stamp paper, including the names of the coparceners and the karta. It should also include the capital which has been invested for starting this family. There is a fixed format for this kind of a deed, which can be created with the help of legal notary public agents.

Step 2: Application for a PAN Card

Form 49A can be used for applying for a PAN card, which is mandatory when creating an HUF. This can be done through both online and offline modes. Once the PAN card is obtained, the HUF can file income tax returns and tax deductions.

Step 3: Opening HUF Bank Account

This is the final step, where a bank account must be opened on behalf of the HUF. It will be used for receiving all the payments. The HUF must have a rubber stamp for all the required documents while opening the account.

What Are the Documents Required for HUF Registration in India?

The documents required for a Hindu Undivided Family (HUF) registration are as follows:

PAN Card copy of the Karta
Aadhaar Card copy of the Karta
HUF deed
Passport Size photographs of the Karta
Specimen signature of Karta along with family members’ name and relation with the Karta

How to Create an HUF?

Below are the steps to form a Hindu Undivided Family or HUF:

Step 1: At first, create a HUF deed.

A HUF deed is a legal document on stamp paper stating the names of the HUF's Karta, coparceners, and other members.

Step 2: Then, apply for a HUF PAN card.

To apply for a PAN card, use Form 49A from the official website of NSDL.

Step 3: Lastly, open an HUF bank account

This account will source all the received and spent money of the HUF and keep a record.

What Are the Advantages of Forming an HUF?

Below are some of the benefits of HUFs:

A basic tax exemption of ₹2.5 lakhs
Avail a home loan
Able to invest in the market
Generates income through running its own business
Able to own a residential house without paying taxes
Enables to claim an additional tax deduction of ₹25000 on premiums of health insurance of the members of the HUF. This limit can extend up to ₹50000 if there is a senior citizen.

What Are the Disadvantages of Forming an HUF?

Apart from all the benefits of an HUF, there are some advantages as well. These include:

If a coparcener passes away without making a will, Class-1 heirs such as sons, daughters, etc. will inherit their share in the HUF property as mentioned in the Hindu Succession Act.
The HUF status of a joint family continues until the co-parceners choose to initiate a partition.
Coparceners of a HUF cannot transfer or gift their rights in the HUF assets during their lifetime. However, they can bequeath their share through a Will in the HUF assets.
The karta holds more authority compared to the co-parceners or other members.
New members entering the family through birth or marriage, including an unborn child, possess an equal right in the HUF property.
Closing a HUF can be complex as it requires the consent of all the members of the Hindu Undivided Family.
Each member is liable to pay taxes on the profit they receive on the dissolution of an HUF or the selling of its assets as per the regulations of the Income Tax. This tax is assessed considering the gain as their individual gain.

FAQs About Hindu Undivided Family (HUF)

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What Are the Residential Statuses of an HUF?

The residential statuses of a HUF under the Income Tax Law are: i) Resident and ordinarily resident in India, ii) Resident but not ordinarily resident in India, and iii) Non-resident.

What does it mean by residential status in HUF?

The taxation of an individual in India depends upon their residential status in the country during the specific financial year. The determination of a Hindu Undivided Family's (HUF) residential status depends on the control and management of its affairs. That is calculated for each year separately.

When is the HUF considered a resident and ordinary resident (ROR) or a resident but not-ordinary resident (RNOR)?

The Karta will be considered a resident and ordinary resident (ROR) if he satisfies these conditions: i) if he is a resident in India for at least 2 years out of 10 years immediately preceding the relevant year, ii) he should stay in India for 730 days or above during 7 years of immediately preceding the relevant year.

Can a woman be the Karta of a HUF?

Yes, the Delhi High Court in 2016 declared that the eldest member of an HUF can be the Karta, be it a male or female member of the family. The High Court says no restriction in the law prevents the eldest female co-parcener of a HUF from being its Karta. However, the Income Tax Act has not incorporated this law yet.

Can an HUF file income tax in India?

Yes, a Hindu Undivided Family (HUF) is treated as a separate taxpayer under Indian tax laws and can file its own income tax return. It must have a valid PAN and can report income from sources like business, property, or investments. To estimate the tax liability accurately, an HUF can use an Income Tax Calculator by entering its income details and applicable deductions.