Hindu Undivided Family

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Hindu Undivided Family (HUF)

What is an HUF?
As the name suggests, an HUF is a family of Hindus. HUF means Hindu Undivided Family. You can save taxes by creating a family unit and pooling in assets to form a HUF. HUF is taxed separately from its members. A Hindu family can come together and form a HUF. Buddhists, Jains, and Sikhs can also form a HUF. HUF has its own PAN and files tax returns independent of its members.

Basic criteria for an HUF
There are some essential conditions that must be fulfilled to qualify as an HUF. These are outlined below:
1. Only one member or co-parcener cannot form an HUF;
2. The joint family continues even in the hands of females after the death of the sole male member;
3. An HUF need not consist of two male members. One male member is enough. For example, a father and his unmarried daughters may form and HUF.

Who is Karta:
The person who manages the affairs of the family is known as the karta. Normally, the senior- most member of the family acts as karta. However, a junior male member can also act as karta with the consent of the other members.

Income tax benefits:
A HUF is eligible for those exemptions that are available to a resident Indian who is not a senior citizen. It can own property and also have its own business.
Let us take an example of a nuclear family. Rajesh is married to Kritika and have two minor children, Komal (daughter) and Ravi (son). Rajesh's annual income is Rs 10,00,000 and Kritika's Rs 10,00,000. Rajesh has inherited an ancestral property, an apartment, which is on rent (annually Rs 3,00,000). If Rajesh forms a HUF, with him the Karta (head of the HUF), his children will be called coparceners and his wife will be a member. The first benefit for Rajesh is that the rental income of Rs 3,00,000 which was hitherto assessed as part of his income will now be carved out and shown as HUF income, and the HUF will be assessed separately as another entity and will have the benefit of tax exemptions similar to those received by Rajesh. This will lead to reduction of income tax being paid by Rajesh and the HUF will pay a much smaller amount of income tax on this income of Rs 3,00,000 after enjoying the exemptions available. Also, the gifts received by the coparceners/ member (beyond the exemption limit) can be shown as received by the HUF, thereby reducing the income tax burden of both Rajesh and Kritika.

Taxability of HUF:-
1. HUF has its own PAN and files a separate tax return. A separate joint Hindu family business is created since it has an entity separate from its members.
2. Deductions under section 80 and other exemptions can be claimed by the HUF in its income tax return.
3. HUF can take an insurance policy on the life of its members.
4. HUF can pay a salary to its members if they contribute to its functioning of the HUF. This salary expense can be deducted from the income of HUF.
5. Investments can be made from HUF's income. Any returns from these investments are taxable in the hands of the HUF.
6. A HUF is taxed at the same rates as an individual.

What is income of HUF
The following points should be keep in mind while computing income:
1. If funds of an HUF are invested in a company or a firm, fees or remuneration received by the member as a director or a partner in the company or firm may be treated as income of the family (if fees or remuneration is earned essentially as a result of investment of funds). However, if fees or remuneration is earned for services rendered by the member in his personal capacity, it will be treated as the personal income of the member.
2. If any remuneration is paid by the HUF to the karta or any other member for services rendered by him, remuneration is deductible from income of HUF if such payment is genuine and not excessive and paid under a valid and bona fide agreement.

The following incomes are not taxed as income of HUF:-
1. If a member has converted or transferred without adequate consideration his self-acquired property into join family property, income from such property is not taxable in hands of the family.
2. Income of impartible estate (though it belongs to family) is taxable in the hands of holder of estate and not in hands of HUF.
3. Personal income of the members cannot be treated as income of HUF.
4. Stridhan is absolute property of a woman, hence income arising therefrom is not taxable as income of HUF.
5. Income from individual property of daughter is not taxable in hands of HUF even if such property is vested into HUF by daughter.

Deduction from gross total income:
An HUF is entitled for deductions available under Chapter VI-A (as applicable) while calculating its taxable income.

Rate of Tax:
1. An HUF is taxed on same slab rates which are applicable to an Individual.
2. An HUF is liable to pay Alternate Minimum Tax if the tax payable is less than 18.5 per cent (including cess and surcharge) of Adjusted Total Income subject to prescribed conditions.

Who should file return of income?
Every HUF has to file the return of income if his total income (including income of any other person in respect of which he is assessable) without giving effect to the provisions of section 10A, 10B or 10BA or Chapter VIA (i.e., deduction under section 80C to 80U), exceeds the maximum amount which is not chargeable to tax i.e. exceeds the exemption limit.

How to form an HUF?
While there are tax advantages of forming an HUF, you must also meet some conditions:
1. One person cannot form HUF, it can only be formed by a family.
2. A HUF is automatically created at the time of marriage.
3. HUF consists of a common ancestor and all of his lineal descendants, including their wives and unmarried daughters. 4. Hindus, Buddhists, Jains and Sikhs can form HUFs.
5. HUF usually has assets which come as a gift, a will, or ancestral property, or property acquired from the sale of joint family property or property contributed to the common pool by members of HUF.
6. Once a HUF is formed it must be formally registered in its name. A HUF should have a legal deed. The deed shall contain details of HUF members and the business of the HUF. A PAN number and a bank account should be opened in the name of the HUF.

Disadvantage of forming an HUF
Though HUF seems like the perfect way to save tax as a family, it comes with its own drawbacks.
1. Equal rights of members: The greatest disadvantage of opening a HUF is that its members have equal rights on the property. The common property cannot be sold without the concurrence of all the members. Any additions to the family, by way of birth or marriage, become a member of the HUF and get equal rights. A HUF can get too large to manage.
2. Partition: Perhaps the worst nightmare of opening a HUF is closing it down. The only way a HUF can be dissolved is by a partition. All members have to agree to dissolve the HUF. Under a partition, assets are distributed to members which can lead to a lot of disputes and can be a lot of legal hassle.
3. Joint family system losing relevance: HUF was recognised as a separate taxable entity by the income tax department. However, in today's times, where nuclear families are the norm, HUF is losing relevance.
4. HUF continues to be assessed as such till partition: Once a HUF is formed, you must continue to file its tax returns, unless a partition takes place. Any claim for partition is made to the assessing officer. The assessing officer, on receiving such a claim, must make an enquiry after giving due notice to the members. Income from the property which was partitioned is taxed as individual income of the member. If the member forms another HUF with his wife and children, the income of the property which was transferred from the original HUF is taxed in the hands of new HUF.