HUF Tax Assessment Guide: Rules, Exemptions

A HUF (Hindu Undivided Family) is a separate legal entity for the purpose of income tax assessment. Hence, understanding the assessment of HUFs is crucial for taxpayers who wish to optimise their tax liabilities. They can be useful entities to manage family wealth efficiently, while enabling higher tax savings for everyone involved. Let’s learn more about these aspects below. 

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Tax Identity of an HUF

Here are some key pointers worth noting in terms of the tax identity of an HUF. 

• The HUF (Hindu Undivided Family) is perceived as a separate legal entity or person as per Section 2(31) of the Income Tax Act. Hence, it will be a separate entity for the purpose of assessment under the Income Tax Act. 

• The HUF is a family comprising all persons lineally descended from common daughters and including wives and unmarried daughters. 

• Due to this demarcated classification, the HUF will have its own PAN card and dedicated bank account for taxation purposes. 

HUF Assessment

The income of an HUF is only assessed in case it satisfies two conditions: 

• There should be a coparcenership. Also, once the income of a joint family is assessed as an HUF, it continues to be done so in the subsequent years of assessment until the coparceners claim a partition. Such a claim should be made before the relevant assessment year. 
• There should also be joint family property, comprising ancestral property, property transferred by members, and property acquired with the help of ancestral property. 
• Ancestral property in this case is the property inherited by a man from any of his three immediate male ancestors, namely the father, grandfather, and the great-grandfather. Property inherited from any other relation will not be perceived as ancestral property. 

Sources of Income Assessed

Multiple sources of income form the basis of assessment for HUFs. Here are some key aspects worth noting in this case.  

• To compute the income of an HUF, you have to first work out the income under different heads, ignoring incomes that have exemptions under Sections 10- 13A of the Income Tax Act. 
• Income sources include income received from ancestral property, investments, business, etc. 
• Individual earnings of HUF members, like salaries, are excluded from this calculation. 
• If the HUF funds are invested in any firm/company, then the remuneration/fees that a member gets as a partner/director in the firm may be taken as income of the family. This excludes remuneration earned for services given by the member in his personal capacity. 
• In case any remuneration is given by the HUF to its Karta or other family members for services, it will be deductible from the HUF's income. 
• If a member has transferred/converted a self-acquired property without adequate consideration to join the family property. In this case, income from this property will not be taxable in the hands of the HUF. 
• Income from an impartible estate, even though it belongs to the family, is taxable only in the hands of its holder and not the HUF. 
• Stridhan is also the absolute property of a woman, and hence any income from the same is not taxable for the HUF. 
• Income from the individual property owned by the daughter is also not taxable in the hands of the HUF, even if the same is vested by her into the HUF. 
• Income from ancestral property held by the following families can be taxable as the income of the HUF- 

1. A family of a husband and wife (no child)
2. Two widows of deceased brothers
3. A widowed mother and her sons (major or minor)
4. Mother, son, and son’s wife
5. Two or more brothers
6. Uncle and nephew
7. A male and his late brother’s wife. 

The following incomes are not taxed as the income of an HUF -  

• If a member has transferred/converted his/her self-acquired property into joint family property without due consideration, income from this property is not taxable in the family’s hands. 
• Income of an impartible estate (even though it belongs to the family) is taxable in the hands of the estate holder and not the HUF. 
• Income from the individual property of the daughter, even if it is vested in the HUF by her. 

Filing and Compliance

HUFs have to use ITR-3 for tax filing, in case they have foreign assets or income. Otherwise, they will use ITR-4, just like individuals and firms. 

Here are some other points pertaining to exemptions/deductions: 

• The HUF is allowed to claim deductions under Chapter VI-A (deductions under Section 80C-80U) as applicable, while calculating taxable income. 
• It is taxed at the same slab rates as those that apply to individuals. 
• HUFs have a liability to pay the Alternate Minimum Tax in case the overall tax payable is lower than 18.5% (inclusive of surcharge and cess) of the Adjusted Total Income (subject to conditions). 
• HUFs have to file a return of income in case the total income, without giving effect to the provisions under Sections 10BA, 10B, and 10A and Chapter VI-A, surpasses the maximum amount not chargeable to tax. 
• HUFs whose accounts have to be audited should file their taxes by 30th September, while others have to file by 31st July. 
• As per the rules under Section 64 (2) of the Income Tax Act, in case a member of an HUF transfers individual property to the entity without any fair compensation and converts it into a HUF property, then the income resulting from the same will be clubbed in the hands of the person making the transfer. 

Tax audits under Section 44B will be conducted by a chartered accountant in case the gross receipts of the HUF surpass ₹1 crore in business or ₹50 lakhs in profession. 

Advantages & Limitations

Now that you have a fair idea regarding the assessment of HUFs, here is a closer look at some of the tax-saving opportunities and other necessary aspects. 

• HUFs may separately claim exemptions/deductions under tax laws since they are independently taxed from their members. 
• This means that if you, your spouse, and two children create an HUF, then all four members and the HUF may claim deductions under Section 80C, for example. 
• HUFs may also pay salaries to their members, and this may be deducted from their income while filing. 
• Rental income on ancestral property may be directed to the HUF as its income, thereby lowering the taxable income of individual family members. 
• Family business profits may be received in the name of the HUF, while the Karta's salary and other expenditures may be used to lower this taxable profit. 
• HUFs may give loans to members with some basic rules, while not charging interest on the same. 
• When disputes are settled via the HUF route, it will not attract capital gains tax or gift tax, or even clubbing of income. This is a way to save tax on salary, even at the time of disputes. 
• HUFs get the same tax exemption limits on total tax income, which is over and above the benefits that individual family members already get. 
• Capital gains exemptions are also provided as per Sections 54F and 54, while gifts collected up to ₹50,000 are also not taxable. The corpus may be used for investments in tax-free instruments, likewise. 

Key Documents Needed By HUFs for Tax Filing 

• HUF deed with the names of the Karta and coparceners
• PAN Card
• Address Proof 
• Bank Statements 

Conclusion

As you can see, there are clear rules of assessment for HUFs, giving you an idea of the incomes to be computed and those that are exempt from assessment. At the same time, there are numerous tax-saving opportunities for HUFs, making them a viable solution for individual family members at multiple levels.