HINDU UNDIVIDED FAMILY (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.
HUF Formation
A Hindu Undivided Family (HUF) is a kind of an entity that could be a launching pad to the entrepreneur who wishes to have a smoother foray into the world of business, thanks to the tax benefits and lesser compliance requirements.
HUF is a unique type of legal entity which derives its roots from Hindu Law. HUF is an entity as a family, which consists of male lineally descended from a common ancestor. The members of the family would also include their spouses and unmarried daughters. Given the nature of the entity, the relation of HUF’s arises from status and not legal contracts. This article seeks to guide the aspiring entrepreneur on the formation of a HUF.
Schools of Law
A HUF forms under two schools of law, which are Dayabhaga and Mitaakshara.
Dayabhaga
The Dayabhaga School of law entitles the son/daughter to acquire the right in the family property after the demise of the father. This school of law is fervently practised in the states of West Bengal and Assam.
Mitaakshara
In stark contrast to what has been described above, the son acquires a right in the family property with the effect of his birth. This school of law is practised throughout India.
Prerequisites for Formation
A HUF establishes in compliance with the requirements specified below:
Capital
Capital is one of the major considerations with regards to the set-up of any business entity. A HUF establishes by using the ancestral property, assets gifted by relatives and friends, or received by the HUF through a will.
Members
If a married couple forms HUF, then the child would be integrated into the entity after his/her birth. The person of another religion cannot form an entity, except for Sikhism and Jainism.
On a detailed note, the members of a HUF include a Karta, members, and coparceners. The Karta heads the family with decision-making responsibilities. Any male member could play the role of a Karta with the consent of the family members.
A coparcener is a person who is entitled to his/her share of the property. A coparcener is classified into the following hierarchies:
- A first-degree coparcener could be a first-time holder of ancestral property.
- A second-degree coparcener includes the sons and daughters of the family.
- A third-degree coparcener includes the grandsons and granddaughters of the family.
- A fourth-degree coparcener includes the great grand-sons of the family.
The HUF wouldn’t cease to exist on the death of a sole male member. It would continue to function with the existing female members. However, a widower to a Karta cannot consider as an heir to the throne. An adopted child is entitled to membership but cannot be a coparcener.
Can a Woman be HUF Karta?
Yes! Until January 2016, a woman could not be the HUF Karta. But in a landmark case, the Delhi High Court ruled in favour of a female being the Karta of a HUF. However, the same has not been incorporated in the Income Tax Act as yet.
Can a daughter claim a share in her father’s property where her father had passed away before the amendment made in 2005, giving equal rights to daughters and sons?
No. Both the daughter and the father has to be alive on the date of the amendment for the daughter to get the benefit, irrespective of whether she has been married or not on that date. If the father has passed away before the amendment date, then she wouldn’t have been a daughter on the date of the amendment. Hence she cannot claim a share in father’s property. a. Are there any incomes which are not taxed as income of HUF? b. The following incomes are not taxed as income of HUF c. If a member transfers his self-acquired property to the HUF without receiving proper sale consideration, income from such property is not taxable in the hands of the HUF. It will continue to be taxed in the hands of the member. d. Personal income of the members cannot be treated as income of HUF. “Stridhan” is an absolute property of a woman, hence income from it is not taxable as income of HUF. e. Income from an individual property of the daughter is not taxable in the hands of HUF even if such property is vested into HUF by the daughter.
Should a HUF always be a resident of India
It is not necessary that a HUF must always be a resident of India. In case the control and management of the HUF are situated outside India, the HUF would be a non-resident. Where the affairs of the HUF are managed from outside India, the HUF would be a non-resident.
What happens if the eldest male member of the family is an NRI?
A HUF is considered to be a resident of India if the control and management of its affairs happen wholly or partly in India. In some cases, the Karta of the family may be non-resident. The resident status of the family will not change to be non-resident only because the Karta is a non-resident unless the decisions concerning the family are made outside India.
Name
As is the case with the establishment of any entity, the name assigned to the HUF shouldn’t be in contravention with any of the specified laws. However, there is no requirement for obtaining name approval.
HUF Deed
HUF may be formed with or without a legal deed, though it is always advisable to pursue a business with a written document. With respect to a HUF, a legal deed consists of details of membership of the HUF, the source of funds, and the likes of it. The Deed acts as proof of the existence of the entity that has been formed.
The document should include a declaration by a family member for the name of the Karta, powers vested with the Kartha, and the entitlement of the Kartha to hold the transactions on behalf of its members. In addition to it, the document should state the capital that was invested in forming the HUF.
PAN
Followed by the formation of a deed, the Karta is required to obtain a PAN Card, which is an important document for pursuing financial transactions. The application for PAN must be made in Form 49A, either online through the NSDL website or manual means.
The PAN Card must be used by the entity for the filing of income tax returns and claiming applicable deductions. The application for PAN and income-tax return should consist of the signature of the Karta.
Separate Bank Account
As implicit as it might sound, a HUF must function with a bank account, wherein the funds of the entity can be maintained. Maintenance of such bank account is strictly for business purposes, and shouldn’t include the savings of any member.
ASSESSMENT OF HUF:-
An HUF is recognized as a separate assessable entity under the Act. Its income may be assessed if following two conditions are satisfied:
(i) There should be a coparcenership. In this connection, it is worthwhile to mention that once a joint family income is assessed as that of HUF, it continues to be assessed as such in subsequent assessment years till partition is claimed by coparceners.
(ii) There should be a joint family property which consists of ancestral property, property acquired with the aid of ancestral property and property transferred by its members.
Ancestral Property: Ancestral property may be defined as the property which a man inherits from any of his three immediate male ancestors, i.e. his father, grandfather and great grandfather. Therefore, property inherited from any other relation is not treated as ancestral property. Income from ancestral property held by following families is taxable as income of HUF:
(a) A family of widow mother and sons (may be minor or major) ;
(b) Family of husband and wife, having no child ;
(c) Family of two widows of deceased brothers ;
(d) Family of two or more brothers ;
(e) Family of uncle and nephew ;
(f) Family of mother, son and son's wife ;
(g) Family of a male and his late brother's wife.
Note: Property obtained by daughter from joint family property would be her absolute property. Any income therefrom is chargeable to tax in her hands in the individual status only. This will also apply to any legal heir obtaining property in the capacity of a descendent.
1 Partition of HUF: Partition means division of property. Where the property is capable of admitting a physical division, share of each member is determined by making physical division of the property. On the other hand, where the property is not capable of physical division, partition shall mean such division as the property may admit.
Though partition can be claimed only by coparceners, the following persons are also entitled to their share in the property:
(a) A son in the womb of mother at the time of partition;
(b) Mother (gets equal share if there is partition between sons after the death of father); and
1.1 Assessment after partition (Section 171): Once income of a joint family is assessed as income of a HUF, it will continue to be assessed as such until one or more coparceners claim partition. Such claim must be made before the relevant assessment year. The Assessing Officer, on the receipt of such claim, must make an enquiry after giving due notice to the members and record a finding whether there has been a partition and, if so, the date of partition.
Income of the family from the first date of the previous year till the date of partition is assessed as income of HUF and, thereafter, income from the property which was subject to partition is assessed as individual income of the recipient members. If, however, the recipient member forms another HUF along with his wife and son(s), income of the property which was subject to partition is chargeable to tax in the hands of new HUF.
1.2 Partition – Total or partial: Under the Hindu law, an HUF is entitled to effect a partition which may be total or partial.
Total partition – where an HUF undergoes a total partition, the entire joint family property is divided amongst all coparceners and the family ceases to exist as an HUF.
Partial partition – A partial partition, on the other hand, may be partial as regards the persons constituting the joint family or as regards the properties belonging to the joint family or both.
(a) In a partial partition, as regards the persons constituting the family, one or more coparceners may separate from others and the remaining coparceners may continue to be joint.
(b) In a partial portion, as regards the property, a joint family may make a division and severance of interest in respect of a part of joint estate while retaining their status as a joint family and holding the rest of the properties as joint and undivided property.
1.3 Effect of partial partition [Section 171(9)]: After the enactment of section 171(9), partial partition is not recognised under the Act. The provisions of section 171(9) is applicable on satisfaction of two conditions, firstly, the partial partition should have taken place after December 31, 1978 and secondly, such partition must have taken place in an HUF which was assessed as a HUF before.
If the above two conditions are satisfied, such family will continue to be assessed as if no such partial partition has taken place,i.e., the property or source of income will be deemed to be belonging to the HUF and no member will be deemed to have separated from the family.
Each member or group of members of such family immediately before such partial partition and the family will be jointly and severally liable for any tax, penalty, interest, fine or other sum payable under the act by such HUF, whether before or after such partial partition.
The several liability of any member or group members of such family will be computed according to the portion of the joint family property allotted to him on such partial partition.
TAXABILITY OF HUF:-
In order to compute the income of an HUF, one has to first ascertain its income under the different heads of income (ignoring incomes exempted under sections 10 to 13A of the Act). The following points should be keep in mind while computing income:
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.
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:-
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.
Income of impartible estate (though it belongs to family) is taxable in the hands of holder of estate and not in hands of HUF.
Personal income of the members cannot be treated as income of HUF.
"Stridhan" is absolute property of a woman, hence income arising therefrom is not taxable as income of HUF.
Income from individual property of daughter is not taxable in hands of HUF even if such property is vested into HUF by daughter
1 Deduction from gross total income: An HUF is entitled for deductions available under Chapter VI-A (as applicable) while calculating its taxable income.
2 Rate of Tax:
An HUF is taxed on same slab rates which are applicable to an Individual.
An HUF is liable to pay Alternate Minimum Taxif the tax payable is less than 18.5 per cent (including cess and surcharge) of "Adjusted Total Income" subject to prescribed conditions.
How to save tax by forming an HUF?
A HUF is taxed separately from its members, therefore, deductions (such as under Section 80) or exemptions allowed under the tax laws can be claimed by it separately. For example, if you and your spouse along with your 2 children decide to create a HUF, all 4 of you as well as the HUF can claim a deduction for Section 80C
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.
Deductions under section 80 and other exemptions can be claimed by the HUF in its income tax return.
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