Introduction to HUFs

by Guest Blogger on June 21, 2012

in Tax

This post is written by Shiv Kukreja

The Hindu Undivided Family (HUF) structure is a very effective way to save tax and a lot of people are eligible to create HUFs but somehow there is very little awareness about it.

I think that’s because most of us don’t know how easy it is to create an HUF. In fact, it is as easy as getting married. I would say it might be difficult for somebody to get married but it is very easy to create an HUF.

An HUF is automatically constituted the moment a person gets married and completes seven pheras around the holy fire and they get married.

That means a Hindu male needs to do nothing to get an HUF created but to get married to a Hindu female. It is one marriage gift that all Hindus get from the government or Hindu Law. It is not necessary to have children to create HUF.

Sikhs, Jains and Buddhists can also create an HUF under the Income Tax Act even though they are not governed by the Hindu law.

What is an HUF?

An HUF is a separate and a distinct tax entity. The income of an HUF can be assessed in the hands of the HUF alone and not in the hands of any of its members. The senior most member of the family who manages the affairs of the family is called the Karta. Minimum two people (at least one male member) are required for the HUF to come into an existence.

A coparcener is a member of the HUF, who by birth acquires an interest in the joint property of the family, whether inherited or otherwise acquired by the family.

Coparceners have a right to claim partition of the HUF. Other members of the family cannot ask for a partition of the HUF and have no right to claim a share in the family property. Coparceners consist of a Karta and his lineal descendants within the following four degrees:

  • 1st Degree: Holder of the ancestral property for the first time – Karta
  • 2nd Degree: Son(s) and Daughter(s) of the Karta
  • 3rd Degree: Grandson(s) of the Karta
  • 4th Degree: Great Grandson(s) of the Karta


A daughter, after her marriage, would remain a coparcener in her father’s HUF and at the same time, can become a member in her husband’s HUF. In the event of the death of the Karta and in the absence of any male member, two females can continue to run the HUF and the senior female can take over as the Karta. A son can create his own HUF while remaining a coparcener in his father’s HUF.

Capital Infusion: Here comes the most difficult part for someone to start the HUF operating – generating capital for the HUF.

One should not contribute his own personal assets or funds into the HUF as any income generated from these assets or from its investment will be clubbed into Individual’s personal income under Section 64 (2) of the Income Tax Act and hence taxed accordingly.

But there is a way out – one can transfer his personal assets or funds into the HUF if the income generated from these assets or from its investment results in a tax free income (like tax free bonds) and hence there is no scope of any tax liability due to clubbing of taxable income.

This tax free income can then be reinvested to earn even taxable income and eventually all of the income would fall out of the clubbing provisions.

Gifts or inheritances meant for the benefit of all the members of a family should be diverted specifically to the HUF. HUFs are liable to pay tax if the value of the gifts taken from the strangers exceeds Rs. 50,000. Though there is a limit for an HUF to take gifts from the strangers, gifts of a higher value can be taken from the relatives, who are not the members of the HUF.

Here is the list of people who fall in the category of relatives:

  • Karta’s Wife
  • Brother(s) or Sister(s) of the Karta
  • Brother-in-law or Sister-in-law of the Karta
  • Immediate Uncle(s) or Aunt(s) of the Karta
  • Immediate Uncle-in-law or Aunt-in-law of the Karta
  • Lineal ascendant or descendent of the Karta or Karta’s wife

A father can also gift money to his son’s HUF but need to specify in the gift deed that the gift has been made to the son’s HUF and not to the son as an individual. Ancestral property can be an asset of the HUF and an income earned on this property can be classified as the income of the HUF. If any of these ancestral properties are sold, the money received on such a sale should be transferred to the HUF.

How to get started with the HUF?

Once there are two eligible family members ready to operate an HUF, the first thing to do is to apply for a PAN card in the name of the HUF and have a separate bank account opened.

For a PAN application, an affidavit by the Karta stating the name, father’s name and address of all the coparceners on the date of the application is considered sufficient as the document proof of identity of the HUF. Also, the identity and address proof of the karta will be treated as the address proof of the HUF.

Then start seeking for gifts or inheritances from relatives or strangers, keep on infusing your own capital, transfer family’s assets/properties to the HUF and do all the possible things that you can keeping in mind the clubbing of income provisions.

Here is a link that contains a sample HUF deed.

Sections/Provisions under which HUFs can claim Deduction/Exemptions and Save Tax

As already mentioned, an HUF is a separate and a distinct tax entity and just like any other Resident Individual assessee, it also enjoys a basic tax exemption of Rs. 2,00,000. All other tax slabs are also exactly same as for an Individual. Here is a useful link from Bemoneyaware that shows the TDS rates for Individuals and HUFs.

Section 80C: HUFs can claim tax exemption under Section 80C by investing money in ELSS, ULIPs, traditional insurance plans, NSC or 5 year Bank FD with a scheduled bank. Principal repayment on a housing loan taken by the HUF can also be claimed under this section. HUFs are not allowed to invest in PPF anymore.

Section 80D: Members of the HUF can take a family floater policy and make the HUF pay for its premium and enjoy the tax benefit too.

Section 80DD: If any dependant member of the HUF is normally disabled (not less than 40% disabled) and the HUF makes an expenditure for the medical treatment, training and rehabilitation of that disabled member, then the HUF can claim a deduction of Rs. 50K under this section. If the condition is of a severe disability (equal to or more than 80%) then the HUF can claim a deduction of Rs. 100,000.

Section 80TTA: Interest earned on the money deposited in the savings bank account up to Rs. 10,000 p.a. is exempt for an HUF also.

Section 24 (b): Interest on Housing Loan: If an HUF takes a loan for buying out a residential property, it can claim a deduction of Rs. 150,000 in respect of Interest on Housing Loan.

30% Standard Deduction on a Rented Property: An HUF can claim a standard deduction of 30% from the rental income it earns by letting out a property.

Capital Gains on a House Property: Tax on Capital Gains made by selling a house property can be saved if the HUF invests the proceeds into buying another property within two years from the sale of the said property. The money can also be invested in Capital Gain bonds offered by REC and NHAI with a lock-in period of 3 years. The interest income on these bonds would be considered a taxable income of the HUF.

The table below shows how the income of an individual in the 30% tax bracket can be split between two entities to lower the final tax outgo:

Introduction to HUF

Introduction to HUF

Some Other Important Points

  • Karta can be paid a reasonable salary for his services of managing day to day affairs of the HUF. The salary will be considered his personal income but at the same time it is deductible as an expense from the books of the HUF.
  • Only one member or coparcener cannot form an HUF. There have to be at least two members and at least one male member.
  • HUF can keep its normal functioning even with two females after the death of its sole male member.
  • The Hindu Succession (Amendment) Act 2005 has given equal rights to male and female in the matters of inheritance as a result of which a daughter now also acquires the status of a coparcener.
  • An HUF cannot become partner in a firm but a Karta can.

These were some important aspects when it comes to creating an HUF and everyone, who is eligible to create an HUF and pays taxes, should strongly consider this option as it is a very efficient and good way to save tax.

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{ 135 comments… read them below or add one }

Prabodh February 8, 2013 at 4:37 pm

Very information and very well written article! I am recently married and have already created a HUF which has a small corpus of a few thousand rupees based on gifts received for festivals from relatives. Recently, my parents sold their house and intend to gift the proceeds after taxation and Section 54EC investments to us (i.e. my HUF). Given that this amount exceeds Rs.50,000, will it be considered proceeds of sale of ancestral property and can be taken into the HUF account without any tax impact? If yes, is a cheque payment by my parents to HUF sufficient, or should they also do a gift deed to my HUF? Or will the proceeds, if transferred, be treated as income to HUF?

Reply

Manikaran Singal June 18, 2013 at 4:02 pm

Manshu/Shiv

Do you know this person. This article is 100% copy of yours http://bhavikkshah.blogspot.in/2012/07/hindu-undivided-family-huf-better-way.html

Reply

tvraao July 8, 2013 at 3:16 pm

Can HUF raise interest free loans from its members as well from others ?

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Manshu July 8, 2013 at 9:05 pm

It can get gifts which I think serve the same thing as interest free loans unless you have something else in mind. I don’t know whether they can get interest free loans or not but I haven’t read anything that says it is not allowed so I think it should be okay to get an interest free loan.

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Vivek Mandot August 27, 2013 at 7:41 pm

I have questions that are not asked till now in this forum

1. We are three brothers, can my Father create his HUF with He himself, my Mother and only one or two brothers into his HUF. Is it mandatory that All the three bothers will become members of His HUF.
2. After Marriage of any of brothers, will their wives automatically become member of Father’s HUF or they will not become members
3. During the formation of HUF, whether my Father have any say in including members into His HUF.( like grand son, grand daughters etc)

4. If I start my HUF after marraige, can I loan amount to HUF to invest in stocks. In case HUF get return on this Investment (like shares, futures and options, or commodities ETF etc), will it be clubbed with my income ( i am salaried).
5. Can this loanto HUF be Interest free or I should charge nominal interest like 4-5% to avoid clubbing provisions

Regards

Reply

hk desai October 6, 2013 at 6:23 pm

Dear Shiv
1. I & my wife received cash gift (Rs.51000/-) from my parents on our marriage anniversary. I have created a HUF bank account and put money there. I am a salaried person, for which i have a separate PAN no. and IT return is also filed separately. We do not have anything in writing. Is it alright ? Is it required to have gift by check or a sale deed.
2. HUFdoes not have any immovable assest .
3. an HUF utilise this money and other cash gifts received by family members ( on birthday or marriage anniversary ) and loan from members of HUF to start a small business ?

Reply

hk desai October 6, 2013 at 6:36 pm

1. My HUF does not have any immovable assest . I & my wife received cash gift (Rs.51000/-) from my parents on our marriage anniversary. I have created a HUF bank account and put money there. We do not have anything in writing about this gift. Does keeping this money in HUF account will attract clubbing ?

2.Is it required for HUF to receive gift by cheque or a gift deed.

3. Can cash gifts received by family members ( on birthday or marriage anniversary ) be transferred to HUF account ?
4. An HUF without movable asset can take loan from members and start a small business ?

Reply

Taral Patel December 24, 2013 at 7:30 am

I am 45 today. I received Rs. 2 Lakhs Cash on various occasions, in Diwali Gifts, Marriage, Birthdays etc which my mom gave me recently. I got married at 22. Obviously, this is CASH received from various relatives and that too 18 years ago to my mom for which I have no receipts.

Can I open HUF a/c with this initial corpus of Rs. 2 Lakhs which I got cash from mom and deposit this amount received as gifts as initial capital during HUF formation?

I was needing this cash money for my angiography – so didn’t open HUF last year but now have got mediclaim received in my a/c. Can I form HUF with this corpus?

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rohit chadha December 28, 2013 at 1:09 am

Dear Shiv
i have a query.
If a property is gifted by the father to his son and the son treats the rent received on it as his HUF income , without transferring the propety to the HUF, then does the propety becomes the propety of HUF or no , as it remains in the son/kartas name and is not transferred to HUF.
Can the son will this propety to any one of his heirs or it remains the propety of the HUF and all the members of the huf have equal rights to the property.
Please clarify.

Reply

DESAI December 28, 2013 at 9:49 am

I think property must be owned by HUF, once it is owned by HUF it may not be willed by Karta.

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Avinash January 3, 2014 at 4:56 pm

Hi,

Thank you for the nice article. I have couple of questions. My father was a retd govt employee. He created HUF and transfered some of his amount to HUF – only enough, not to attarct tax. He passed away, leaving me and my mother as the members of his HUF.

1. Can I add my wife and children to this HUF?
2. Can the FDs, MFs, shares and insurance amount received upon his death by mother as nominee be transfered to HUF (no such will exists)?

Reply

Avinash January 24, 2014 at 2:39 pm

Hi Shiv, could you please share your xpert opinion on my question? Or anyone else wants to give it a shot?

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DESAI January 24, 2014 at 4:15 pm

I THINK YES

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Ritesh Agarwal January 6, 2014 at 6:54 pm

Hi Shiv,

Thanks a ton for sharing the information. This is indeed a great thread on HUF. I have some questions regarding HUF and I would really appreciate if you could help me.

My cousin was the Karta of a HUF. He is survived by his wife and two minor children. HUF invested in mutual funds, FDs, equity shares (through demat) etc. Here are my questions:

1. What is the best option to either continue / discontinue the HUF?
2. Do you think that succession certificate will help?
3. Who can be the Karta if a new HUF is formed and the particulars of old HUF is transferred in the new HUF?
4. Any pointers on the process for q2 and q3 will greatly help me

Thanks in advance for your help

Ritesh

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DESAI January 24, 2014 at 4:17 pm

I thnink better to continue HUF.

Reply

Santosh Kumar Agarwal February 9, 2014 at 12:51 pm

Sir
I have gone through your article. It helps very much to in reach my knowledge.
For better understanding please reply the under noted
A family consist of the followings:
a. Karta
b. Wife of Karta
c. 1 Married son along with his wife and 2 son and 1 daugher
d. 1 Married son with his wife
e. 1 Unmarried son
f. 1 Married daughter and her husband 1 son and 1 daughter
g. I Married daughter and her husband
h. 1 Unmarried daughter.

In the above circumstances please mention who are the members of family, who are coparceners and at what percentage they get their shares if the HUF dissolve right now.

Your valuable reply will highly appreciated.

Santosh

Reply

amit jain March 10, 2014 at 11:11 pm

can a mother who is a doctor can give a gift of Rs. 15 lacs to his son’s huf is this amount is exempt from gift tax and whether any clubbing provision will attract ?
if gift is taken in individual capacity and then transferred to huf then whaa will be the tax implication?

Reply

DESAI March 12, 2014 at 1:09 pm

In my opinion

1. There shall not be any Gift tax and clubbing.
2. If individual transfers to HUF, clubbing provision shall be applicable

Reply

ankit May 3, 2014 at 10:46 pm

Is there any immovable property constructed by an partnership firm formed by the individual members of h.u.f being trasferred to h.u.f ?

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chint May 12, 2014 at 2:48 pm

Hi Shiv, i have a query on nomination as below. appreciate if you can reply at earliest.

My father is the karta of the HUF account. please can you confirm the successor as karta’s wife i.e my mother ? and whether the successor can use all the funds ?

Concern is around the nomination which HUF a/c doesn’t allow. my father wants to pass on the HUF a/c’s investment amount to my mother which is logically correct. Appreciate if you can suggest some other alternative on nomination front.

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DESAI May 13, 2014 at 11:18 am

What is constitution of HUF ?

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S.K.Mehta June 23, 2014 at 12:54 pm

Very informative & useful article .
Pls.forward your further views in future as well at my above e-mail address.
Tks. & Regards

Reply

Dharmesh Hazariwala August 23, 2014 at 4:47 pm

Though only one male member of a family son become absoulute hounour of his fathers property, with the permission of his mother. Son who gets property run huf of account of his father. Now son can give this property to his child by will?

Reply

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