HUF Advisory

A Hindu Undivided Family comes into existence by operation of Hindu personal law upon marriage of a Hindu male — no formal deed or registration is required to form the HUF itself, though a Declaration Deed signed by the Karta (the senior-most male member) is required as documentary proof for tax and banking purposes. To obtain a PAN for the HUF, the Karta must submit Form 49A along with the HUF Declaration Deed, identity and address proof of the Karta, and a signed affidavit affirming the HUF's existence and its members. Once PAN is obtained, the HUF can open a bank account in the name of the HUF (styled as 'Karta Name HUF') at any scheduled bank, with the Karta as sole signatory. An HUF is a separate taxable entity under Section 2(31) of the Income Tax Act 1961 and must file its own return of income under Section 139.

Under Section 64(2) of the Income Tax Act 1961, if an individual transfers self-acquired property to the HUF of which they are a member without adequate consideration (including by throwing individual property into the common pool), any income arising from such converted property is clubbed with the individual's personal income and taxed in their hands during their lifetime. This prevents the common tax-planning practice of gifting appreciated assets to the HUF to split income. However, the Supreme Court in Ganga Saran v. CIT (1981) held that property inherited by the HUF through succession or received as a gift from a non-member does not trigger Section 64(2) clubbing. Income from genuinely ancestral property or property received as gift from third parties is assessed in the HUF's hands at normal slab rates, with the benefit of a separate basic exemption limit of Rs 2.5 lakh under the old regime.

Under Section 10(2) of the Income Tax Act 1961, any sum received by a member from the HUF out of the income of the family is fully exempt from tax in the member's hands, since the same income has already been taxed at the HUF level. This exemption applies whether the distribution is called 'share of profits', 'maintenance', or 'partition distribution' — as long as it is from assessed income of the HUF. However, if the HUF pays remuneration to the Karta for services rendered, that remuneration is deductible in the HUF's hands under Section 40A(2) (provided it is not excessive or unreasonable compared to market rates) and taxable as salary income in the Karta's hands — it is not exempt under Section 10(2). Partial partition of an HUF is no longer recognised for tax purposes after the omission of Section 171's partial partition provisions, so only total partition is effective to terminate HUF tax status.

An HUF can claim deduction under Section 80C of the Income Tax Act 1961 for life insurance premiums paid on the life of any member of the HUF, and for investments in ULIP, ELSS, and five-year tax-saving fixed deposits — up to the aggregate limit of Rs 1.5 lakh per year. However, an HUF cannot invest in instruments restricted to individuals such as PPF accounts (PPF accounts can only be opened by individuals, not HUFs, per the PPF Scheme 2019) or NSC certificates (also restricted to individuals). An HUF can claim Section 80D deduction for health insurance premium paid for any member of the HUF, with the same limits as applicable to individuals. Deductions under Section 80TTA (interest on savings accounts) and Section 54/54F (capital gain exemptions on reinvestment in residential property) are also available to an HUF, as it is an assessable entity under Section 2(31).

The death of the Karta does not by itself dissolve the HUF — the HUF continues with the next senior-most male coparcener automatically becoming the new Karta by operation of Hindu law (post the Hindu Succession Act 1956 amendments, daughters are also coparceners under Section 6 as amended by the Hindu Succession Amendment Act 2005, though the position on female Karta is now settled by the Delhi High Court in Sujata Sharma v. Manu Gupta 2015, recognising female Karta). The new Karta should execute a fresh Declaration Deed, update the bank account mandate, and file an intimation with the Income Tax Department to update PAN records under the existing HUF PAN. If all male coparceners die leaving only female members (widows and daughters), the HUF may terminate and the property devolves on surviving members per their individual shares, at which point the HUF PAN should be surrendered and assessed as 'body of individuals' if applicable under Section 2(31).