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Karan Bir Singh Sidhu

Hindu Undivided Family (HUF): Hindu Undivided Family, often referred to as an HUF is a legal concept, which recognises the joint Hindu family as a distinct unit, in contradistinction to its members. The HUF is capable of holding property in its own right and is regarded as a kind of artificial juridical person. More importantly, it is regarded as a separate unit for the purposes of income tax assessment. The term ‘Hindu’ as used in an HUF also applies to Buddhists, Jains and Sikhs, by virtue of article 25 of the Constitution of India.

An HUF comprise the man, his wife, sons and unmarried daughters. The eldest male member of the HUF is designated as the karta of the HUF and he is practically empowered to take all the decisions on behalf of the HUF. When the sale of an HUF property is involved, it is the karta of the HUF that must sign the sale deed. HUF is also capable of having its own bank account, which is also generally operated by the karta. The male members are referred to as the coparceners of the HUF and each of them have a share in indivisible HUF corpus. The wife is a member of the HUF, but not its coparcener. In the event the HUF is divided amongst the father and his sons, the wife gets an equal share; else she is merely entitled to maintenance by the HUF. The unmarried daughters have the right to their marriage expenses being met by the HUF and also a reasonable amount of “stree-dhan”. The married daughters have no interest whatsoever in the HUF of their father.

It is not the objective of this section to delve into the HUF law, which is a complicated branch of customary Hindu law, but to highlight features that through up interesting option for an individual, while making investments in immovable property. These are particularly useful when dealing with rent-yielding properties, since considerable income tax efficiencies can be achieved, if the property is purchased in the name of the HUF.

Ancestral property vesting in a Hindu male, by virtue of lineal devolution, can easily be regarded as HUF property. However, it is a common misunderstanding that a married man must have a male child, for him to constitute his own HUF. This is an incorrect notion. A Hindu male acquires his own HUF the moment he marries, and automatically becomes the karta thereof. At the same time, he continues to the coparcener in the HUF of his father, until the same is formally divided. A Hindu male can be the karta of more than one HUFs, the bigger HUF, that his father once headed, and his own, smaller HUF. Both are different units for the purpose of income tax.

HUF is an excellent income tax saving unit, when it comes to families where both the husband and the wife are in the highest tax bracket. Suppose, a person is desirous of purchasing a property, which he intends to rent out. In case he purchases that in his ‘individual’ capacity, the income from the same will be clubbed with his salary income/ professional earnings. Since the wife is also in the highest tax bracket, no tax efficiencies shall be achieved by purchasing the property in her name. It is here that the HUF provides a useful avenue to save taxes.

If this property if purchased in the name of the HUF, the rental income shall be entitled to the basic exemption permissible under the law, and all other exemptions/ deductions pertaining to rental income. The HUF can also make deposits in the PPF and claim further tax rebate. The HUF can also borrow and set of the interest paid against the rental income.

Interestingly, the HUF property also provides an excellent tax saving tool, where the husband and the wife are in occupation of the said property. This is particularly so in the case where they are getting House Rent Allowance (HRA) from their employer(s). A person who occupies a house standing in his name, in ‘individual’ capacity, cannot claim any rebate on account of the HRA received by him, and the same is added in toto to his salary income. However, if the house occupied is in the name of his HUF, of which he himself, is the karta, he can pay sufficient monthly rent to the HUF and claim almost total tax exemption qua the HRA. The wife can make similar payments of rent to the HUF and get similar deduction.

It may be noted that the incidence of the income in the hands of the HUF would be much smaller on account of:

i. the basic exemptions being available to it, as regards the basic tax slab;

ii. deduction in respect of the rental income, which is 25% of the rental income; and

iii. further deduction/ tax rebate on account of deposits like PPF, that qualify under section 88 of the Income Tax Act, 1961.

In summary, it can be suggested with a great deal of confidence that the first property that a person acquires should be in the name of his HUF, especially where both the husband and wife are earning handsome salaries. It is also useful to start building the HUF capital, for instance by opening an HUF PPF account, long before one intends to buy any immovable property. This should be done immediately after the marriage.

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