What is HUF (Hindu Undivided Family)?
A “Hindu Undivided Family” is a separate legal entity as per the Income Tax Act. HUF can be formed by Jains, Sikhs, and Buddhists along with Hindus. There are various incomes that are arising for the whole family and not in the name of a specific individual of the family. A HUF can have all the sources of income like Income for house property, income from a business, income from other sources, but a HUF cannot have Income from Salaries.
For example, suppose husband earns 25 lakhs per annum and his wife earns 18 lakhs per annum and they also earn 8 lakhs from the rental of their joint property. The rental shall be clubbed with the person earning a higher income. By doing so, they will be paying a 30% tax for the rental income as they fall in the highest income tax slab. But if they form a HUF, then they can show this rental income as the income of the HUF and can save tax as HUF is a separate legal entity.
How to Form a HUF?
A HUF automatically formed after the marriage of an Individual and only a HUF creation deed is to be made in a stamp paper. After doing so, a separate PAN card should be obtained for the HUF and a separate bank account should be opened in the name of the HUF.
CO-PARCENERS of Hindu Undivided Family
- Some of the members of HUF are designated as coparceners.
- All coparceners are members of HUF, all members are NOT coparceners.
- Husband & Wife form HUF; wife can only be member, NOT coparcener.
- Coparcener is different from the other members of HUF, coparceners are those members who acquire by birth an interest in the joint property of the family.
- Coparcenary is restricted to four levels of living order.
- Daughters are also coparcener w.e.f. 9.9.2005 in the Hindu Succession (Amendment) Act, 2005.
- After the Hindu Succession Act amendments equal rights to daughters even after marriage. Married women have rights in two HUFs-their father’s as coparcener and their husband’s a member. There’s no need to fill an application form or submit KYC documents for joining a HUF.
- Members of the family who are not coparceners- No right to claim partition.
- 1st Step Form a corpus for HUF can be any CAPITAL ASSET (like property, gold, jewelry, securities, deposits) or CASH.
- Daughter of a coparcener shall by birth become a coparcener in her own right in the same manner as the son.
- Daughter has the same rights in the coparcener property as she would have had if she had been a son.
- The daughter is allotted the same share as to the son.
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Who can be a KARTA of HUF?
The FATHER of the family in absence, the senior male member of the family. Unmarried daughter, in the unfortunate event of her father passing away, will become Karta IF All male members are minors & natural guardian is a mother then she is the Karta. Where a couple has only one daughter and the husband pass away, the mother-daughter duo can continue the HUF (although a problem may arise after she gets married and becomes a member of her husband’s HUF).
The Karta Have Various Duties that are Managing the affairs of HUF, Maintaining the books of accounts, filing tax returns for HUF, Entering into contracts, form partnership firm, or representation on behalf of HUF.
Females can become a Karta, but only when the male members are minors or are not in a position to manage the affairs and give a declaration to that effect and seek the permission of the Department to allow the female to manage. Champa Kumari Singhi v Revenue (1962) 46ITR81 (Cal).
Moreover, when an existing HUF is reduced to only female members, it can still continue as a HUF with one of the females as a Karta. This is in view of the existence of the potential coparcenary as any widow may, in the future, induct a coparcener into the family by adoption. CIT v RM AR AR Veerappa Chettiar (’70) 76ITR467 (SC).
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Tax Saving through HUF
1. General Benefits:
Hindu Undivided Family (HUF) is treated as a separate entity for the purposes of assessment under the Income-tax Act. Thus there is a Separate exemption limit under the Income-tax Act, Separate deduction u/s 80G, Section 80C, Section 80D, Section 80DD. Other Benefits include Salary to Karta /Member, Separate Income-tax Deduction on Interest on loan for self-occupied House Property in the name of HUF(Sec 24(b)), etc.
2. HUF can also take benefits of exemption of capital gain:
Cost Inflation Index benefit available to Calculate Cost of the Asset, the Tax benefit of 20% Tax on Long-term Capital Gains. (Except for non listed shares-Without STT), Saving Tax on Long-term Capital Gain possible by investing in Capital Gains Bonds of NHAI / REC, Long-term Capital Gains Saving by investing in Residential Property, No capital gains to HUF on Distribution of assets on the partition.
3. Stock Market, Mutual Funds & HUF:
HUF can have a separate Demat Account and can Make money by investing in the Primary Market and Secondary Market. HUF has dual benefits in investing in IPOs’ i.e. the 2 lakhs limit for the investment to be categorized as retail is not breached and there is a greater probability of more shares being allotted, Enjoy lower tax rate of 15% on Short-term Capital Gains (STT Paid), HUF can also invest in a mutual fund.
4. HUF can be a Proprietor:
HUF can act as the proprietor of one or more than one Business concern, a Separate name can be kept for the HUF business entity. There is No requirement of tax Audit of HUF business if Turnover does not exceed the prescribed threshold limit.
5. House Property:
There is a 30% Standard Deduction on Annual value of house property (Rental Income) to HUF u/s 24(a), Self-occupied one Residential House & the tax gain especially by way of Interest on Loan & Repayment of Loan u/s 24(b).
As per section 10(2) of the Income-tax Act, 1961 any sum received by an individual from Hindu Undivided Family of which he is a member is exempt from tax but Amount received not as a member of Joint Family but in pursuance of some statutory provision, etc. would not be exempted in this clause and Member of joint family living apart from the other members does not affect his/her position in the law to claim the right as per section 10(2).
Taxation of money received by HUF without consideration
- Provisions of section 56(2)(vi) applicable even to HUF if any sum of money is received by the HUF exceeding Rs. 50,000 p.a.
- Items received in-kind subjected to the provisions of sec. 56(2)(vi).
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Gift of HUF Property
- The elementary proposition that Karta of HUF cannot gift or alienate property except to the extent recognized under the Hindu Law, namely necessity, etc – CGT v. P.Hanumanthappa 68 ITR 363, K.P. Gupta v. CIT 233 ITR 456
- Reasonable limits depend upon facts – CGT v. B.V. Narasimharaju 101 ITR 74
- Karta can make reasonable gifts to daughters – Sushil Kumar & Sons v. ITO 234 ITR 98
- Gift on Marriage Occasion is valid – S. Lakshmamma v. Kotayya AIR 1936 Mad. 825.
- Gift of immovable property should be for pious purpose – CIT v. Ram Gopal Rajgharia 123 ITR 693
- A gift to Strangers void – Guramma v. Mallappa AIR 1964 SC 510.
Gift by a member of HUF
As per section 64(2), a gift by a member of a Hindu Undivided Family after 31-12-1969 would attract Clubbing of Income in the hands of the member, and as such the income from the converted property shall be deemed to arise to the individual & not to the family.
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Partition of the Hindu Undivided Family
Only coparceners can demand partition. These are of two types-
- Total Partition: Property divided amongst all the family, undivided family ceases to exist.
- Partial Partition: Some family members go out of the fold and others remain joint or some of the property is divided and other remains joint not recognized for tax purpose, after 31.12.1978
As per section 171(9) of the Income-tax Act, 1961 the Partial Partition after 31-12-1978 is not recognized. Even after Partial Partition, the income of the HUF shall be liable to be assessed under the Income-tax Act as if no Partial Partition had taken place.
Procedure to Effect Partition
- Under the Hindu law, HUF may be ended by portioning the property (or whatever assets) of the HUF, but for IT purposes are to be recognized by the AO.
- All coparceners, mother (in case of death of father), wife gets a share separate from husband in case of partition between her husband and sons, son in the womb of mother at the time of partition.
- At the time of making assessment u/s 143, 144, it’s claimed by any member that the partition has taken place AO shall make inquiry after giving notice.
- After inquiry AO shall record a finding as to whether there has been TOTAL PARTITION DATE of such partition.
- Order u/s 171 passed by AO.
- Where partition took place in the previous year is recorded by AO: Income of HUF before partition shall be assessed as no partition has taken place. Each member shall be liable separately and jointly for the income tax thereon.
- For this section, several liabilities of any member or group of members shall be computed according to a portion of the joint family property allotted to him or her at partition.
- The provisions are applicable in levy and collection of any penalty, interest fine, or any sum for a period up to partition date.
- Total partition in the context of the I. T Act means partition by “Metes and Bounds”.
- The Income Tax law will recognize its demise (for want of a better word, since a divided Hindu family can be reunited again), only when the HUF each and every layer of the clothing of property-tangible or intangible, movable or immovable -it had has been removed.
Advantages of Hindu Undivided Family
- Salary to Karta: This salary is taxed as Karta’s income and will be fully deductible from the HUF income.
- Use HUF income for expenses: The income earned by the HUF can be used for the household expenses of the family.
- Distribute income to coparceners: Karta can gift money to the coparceners from the income earned by the HUF. This income is tax-free in the hands of the coparceners. This way, a person with a high income will be able to get tax-free income.
- Give loans for business: HUF can give loans to the Karta or coparceners for setting up business & can charge interest on the loan. Interest paid on any business loan is fully deductible.
- No MAT or AMT: unlike other corporate entities, there is no minimum alternative tax on HUF owned businesses.
- Small-scale industry exemption: or the business community, various exemptions and incentives given to small-scale units are crucial to ensuring healthy margins.
Other Important HUF Rules and Provisions
1. The provisions of computing income of HUF are the same for a normal assessee.
2. As per section 47 of the Income-tax Act, no capital gains shall arise to the HUF on the distribution of assets on the partition of HUF.
3. As per section 49(1) of the Income-tax Act where assets are distributed on the partition of HUF, then the cost of acquisition of such assets to the member shall be the cost of acquisition of such assets in the hands of HUF.
4. Also as per section 49(1), where an individual converts his self acquired property into HUF property without adequate consideration as mentioned in section 64(2), then the cost of acquisition of the converted property to the HUF shall be the cost of acquisition in the hands of the transferor individual.
5. As per section 2(42A) of the Income-tax Act, in the above two cases (points 3 and 4), the period of holding of the asset of the transferor shall also be considered for computing the period of holding of the asset in the hands of the transferee.
6. As per section 171 of the Income-tax Act, the partition of HUF takes place on the date the properties are actually physically divided. There must be a physical division of the properties. Physical division of income without physical division of properties does not amount to partition. Where the property is not capable of physical division, then the division should take place by metes and bound.
For example, the Supreme Court by its order dated 1.1.2013 ordered partition of HUF. The physical division of properties pursuant to the Supreme Court’s order takes place on 30.6.2013. The income from properties of HUF up to 30/06/2013 shall be included in the income of HUF and not the members. As on 31.3.2013, the properties of HUF shall be included in the wealth of HUF and not the members.
7. Remuneration paid by HUF to Karta or any member of HUF:
As per Supreme Court in Jugal Kishore Baldeo Sahai v. CIT, if any remuneration is paid by the Hindu undivided family to the Karta or any other member for services rendered by him in conducting family’s business, the remuneration is deductible if remuneration is:
- paid under a justified, valid and bona fide agreement;
- not prejudicial to the interest of HUF;
- in the interest of HUF and expedient for the business of family; and
- reasonable and not excessive.