• HUF is neither the creation of law nor of contract
• But HUF has not been defined under the Income Tax Act as it could be well derived under Hindu Law
• Tax is payable by every person, u/s 4 of the Income Tax Act, 1961
• The term ‘Person’ defined u/s 2(31)(ii) of the IT Act, 1961 includes a Hindu Undivided Family.

Elements of HUF

Hindu Undivided Family consists of a common ancestor and all his lineal descendants together with their wives and unmarried daughters.

HINDUS

COPARCENER

ELEMENTS

KARTA

MEMBER

How HUF can be formed

• Husband + Wife = HUF. But HUF income will not be assessed separately since the wife can become a member only, not a coparcener. Members have equal rights but cannot demand partition.
• Husband + Wife + Children = HUF which will be assessed separately in Income tax.
• HUF need not consist of two male members. E.g. HUF of father will continue after his death with the son as Karta.
• Blending of coparcener property into HUF Hotchpots with adequate consideration.
• Creation of HUF by inheritance by making WILL in favour of HUF.
• Creation of HUF by partition of larger HUF.
• A Gift specifically given to HUF can form HUF and Husband & wife can constitute HUF. Presence of a minimum of two male members is not mandatory. (The Supreme Court in Pushpa Devi v. CIT 109 ITR 730 (SC) has held that a HUF can accept gifts from a person who is not a coparcener) In C.N. Arunachala Mudaliar v. C.A. Muruganatha Mudaliar [1954] SCR 243, it was held that the court would have to collect the intention of the donor in accordance with the well-known canons of construction

Process to form a HUF entity

• Create HUF Deed with element
  • ● Formal documents on stamp paper
  • ● Name of Karta and Coparcener
  • ● Name of Members
  • ● Name of HUF like Kalpesh Patel (HUF)
  • ● Corpus/capital of HUF.
• Apply for PAN Card
• Open Bank Account in the name of HUF.
• File Income tax return of HUF.

Residential Status of HUF

• ★ Resident - When control and management of affairs of HUF are wholly or partly situated in India
• ★ Non Resident - When control and management of affairs of HUF are wholly outside India

Income Tax Return of HUF

• If income exceeds the basic exemption limit – required to file ITR
• HUF can earn various income same as individuals like
  • ● Business income,
  • ● Rent
  • ● Agriculture income, interest income, dividend etc.
  • ● Capital gain on sale of property
  • ● Income should arise on the investment of HUF Funds.
• HUF cannot earn salary because salary is paid in individual capacity.

Expenses/Deductions under Income tax

• Reasonable and bonafide remuneration paid to Karta
• Reasonable and bonafide remuneration paid to Member
• Repayment of interest on residential loan
• Standard deduction of 30% against rental income
• Business expenses against business income
• HUF can take advantage of 44AD
• HUF can receive gifts from members exceeding Rs. 50,000/ without any liability to pay tax.
• Any sum received by coparcener from HUF is exempt u/s 10(2)
• Deductions under chapter VIA

1. Insurance policy
2. Mediclaim
3. Medical treatment of dependent
4. Donations to charitable institutions
5. Deductions for saving a/c interest

Benefits of HUF Formation

• Taxpayers can save tax in legal manner.
• Enjoy benefit of basic exemption limit
• Deduction also available under Chapter VIA
• HUF can have a separate demat account
• HUF can invest in shares and Mutual funds.
• HUF can give loan to Members
• The sum received by a member on partition towards his share as coparcener is not taxable as income. [Smt. Sudha V. Iyer Vs ITO 15 Taxmann.com 234 (ITATMum)(2011)