What is HUF ?
“Hindu Undivided Family (‘HUF’) is treated as a ‘person’ under section 2(31) of the Income-tax Act, 1961 (herein after referred to as ‘the Act’). HUF is a separate entity for the purpose of assessment under the Act.
Under Hindu Law, an HUF is a family which consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. An HUF cannot be created under a contract, it is created automatically in a Hindu Family.
Jain and Sikh families even though are not governed by the Hindu Law, but they are treated as HUF under the Act.”
Allowed to take insurance policies for its members
Can also pay salary to its members should they contribute to HUF functioning
Investment is allowed from HUF income and returns from such investments are taxable.
Any income that is derived from the below may be regarded as income of HUF:
Profit from business including profession
Income from house property
Given that the HUF is a separate legal entity; it is not entitled to any salary income. Also, any income that is derived from investments made by the HUF is assessed and taxed separately.
HUF arrangement suits those taxpayers who have income from ancestral property and expects to inherit these assets (both real and financial). A taxpayer will be able to divert the inheritance to the HUF account and thus preventing personal tax liability from increasing. In addition, HUF is also beneficial to taxpayers with a higher savings rate.