Inheritance using HUF

I make ₹25 Lakhs per annum in salary and interest. My father is preparing to distribute his assets between me and my brother. He has a property worth ₹5 Crores which he wants me to gift me.

However, on receipt of the rental income of ₹10 Lakhs per annum, it would be taxable in my hands at the highest slab.

Rather than getting a gift, inheriting the property in your HUF may be a better strategy from a tax perspective.

Let us explore how:

What is an HUF?

Under Hindu law, a Hindu undivided family (HUF) is a family which consists of all persons lineally descended from a common ancestor and includes their wives and daughters.

‘Karta’ is usually the eldest member of the family. Rest of the individuals born in the family automatically become the co-parceners of the HUF.

A daughter remains a coparcener in her father’s HUF even after her marriage.

With every birth in the family, the proportionate share of a coparcener decreases and with every death in the family, the proportionate share increases.

A coparcener is different from a member of the HUF. All coparceners are members but not all members may be coparceners. The wife of the coparcener is a member but not a coparcener in that family.

Only the coparceners of an HUF can ask for the partition of the property.

Any woman married to a co-parcener can be a member of the HUF but not a co-parcener.

Can only Hindus create an HUF?

An HUF cannot be created under a contract; it is created automatically in a Hindu family. Jain and Sikh families, even though they are not governed by Hindu law, are treated as HUFs under the Act.

Why should I make an HUF?

An HUF is treated as a ‘person’ under section 2(31) of the Income-tax Act, 1961. It is a separate entity for the purpose of assessment under the Act.

Thus, it is entitled to the slab rate benefit specified in 80C of the Act. The first 10 lakhs of income would be taxed at a much lower rate due to the slab benefit.

Can you please elaborate on this with the help of an example?

Let us assume that there’s a property that you have to inherit that pays your father 10,00,000 in rent each year.

It may be a wise decision from a tax perspective to have the property of the deceased transferred to the HUF of the inheritor, as it helps in saving income tax.

S.No.	Particulars	Case A: Without HUF	Case B: With HUF
S.No.	Particulars	Mr. X	Mr. X	X HUF
A	Income Taxable u.t.h Salary	25,00,000	25,00,000	-
B	Income Taxable u.t.h House Property (Rent of 10,00,000 less 30% of standard deduction)	7,00,000	-	7,00,000
C	Gross Total Income (A+B)	32,00,000	32,00,000	7,00,000
D	Less: Deduction u/s 80C	1,50,000	1,50,000	1,50,000
E	Net Taxable Income (C-D)	30,50,000	23,50,000	5,50,000
	Tax liability (old regime) with cess	7,56,600	5,38,200	23,400
	Total Tax Liability	7,56,600	5,61,600
	Tax saving in Case B over Case A		1,95,000

Can I not take the gift in the name of HUF?

Not just savings in income tax, but Mr. Mukesh, a Delhi based stamp duty expert and Mr. Nikhil Varghese, Founder, Yellow Will, tell us that stamp duty is not applicable in the case of the transfer of assets by way of inheritance.

Stamp duty is otherwise applicable on transfer of real estate assets, including transfers by way of gift as well.

Also, tax experts are of the opinion that gifting the property to the HUF may not be tax exempt as your father may not be considered a relative of the HUF under Section 56 of the Income Tax Act, 1961.

Any risks that I should be aware of?

The co-parceners can demand their share of the assets of the HUF by way of partition. So, for example, your son or daughter, who may be co-parceners in the HUF that receives your father’s property, may demand a share in the property by way of partition of the HUF.

Disclaimer: The name may have been changed due to the confidentiality of the individual. Do consider seeking advice from a qualified tax expert or a lawyer before taking any steps.

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