Taxation of HUF’s (Hindu Undivided Family)

A Hindu undivided family(HUF) is a family which has a common male ancestor and holds joint family assets and that have not been subject to partition.

As per the Income Tax Act, Hindu Undivided Family (HUF) is treated as a separate entity for the purpose of assessment. HUF is a creation of law and does not arise from a contract. The senior-most male member of the family who is also called Karta head’s the HUF. The Karta plays an important role in an HUF as he is the custodian of assets and primary decision maker.

Conventionally, an HUF consists of a Father, sons and daughters. Moreover, a Karta would always be male and wives, daughters or daughters-in-law could not be made Kartas at any point in time. However, with a change to the Hindu Succession (Amendment) Act 2005, the eldest daughter in an HUF can now be made the Karta and coparcener. Wives and daughters in law, however, still cannot be made the Karta or coparcener. Although, in case of death of a Karta with minor children, a wife can be a guardian of the HUF till the minor children become major.

What is a coparcener?

A coparcener is any person in an HUF that has a right to the ancestral property by birth and can call for a partition of the HUF assets. An HUF has two types of members. Members who are also coparceners and members who are just regular members and cannot demand for the partition of assets in an HUF. However, when a partition does take place regular members will get the same share as coparcener members. Wives and daughters in law are regular members and not coparceners. All sons and daughters (post the Hindu Succession (Amendment) Act 2005) of the father/Karta of the HUF are coparceners.

Members of HUF

  • Every male members becomes a part of HUF either by virtue of birth or by adoption.
  • All the unmarried daughters are a part either by virtue birth or adoption.
  • A widow is a member of her husband’s HUF, where she is not a coparcener. As only a coparcener can become the Karta of HUF, thus she cannot become the Karta of her husband’s HUF.
  • Woman abandoned by her husband or divorced in any circumstances will continue to be a member of HUF.

Formation of HUF

  1. A family forms a Hindu Undivided Family, not a single person.
  2. Automatically formation of HUF at the time of marriage.
  3. Members of HUF consist of a common ancestor and all of his lineal descendants, including their wives and unmarried daughters.
  4. Hindu’s, Buddhists, Jain’s and Sikhs can form Hindu Undivided Family (HUF).

HUF Taxation and Tax saving by Forming HUF

  • The main advantage of forming a Hindu Undivided Family is that the whole family gets an extra benefit on separate PAN Card and can divide their family income to save tax and reduce tax liability. In such cases New PAN Card will be allotted to the HUF.
  • Thus, It has its own PAN Card and a separate income tax return will be filed.
  • A separate joint Hindu family business is created as a separate entity which is distinct from its members.
  • As HUF is taxed separately from its members, thus deductions under section 80 and other exemptions can be claimed by them separately.
  • Members of HUF also receive salary if they are contributing to the functioning and work of the joint Hindu family business. Such salary expense can be deducted from HUF’s income.
  • An insurance policy can be taken by HUF on the life of its members.
  • The provisions of computing income of HUF are same as of normal assessee/individual.

Let us understand the Taxability of HUF through an Illustration

Drawbacks of Forming HUF:

Partition of HUF

There are two types of partitions:

a) Total Partition
b) Partial Partition

Total Partition: In case all the assets of the family are divided amongst all the members of the family and the family terminates as HUF, then it is known as Total Partition.

Partial Partition: In case some members of the HUF go out and other remains together or in case some property is divided and some remain joint, then it is known as partial partition. It is not recognized in
the Income Tax Act,1961.
Therefore, Partition has to be a total partition. Partial partition is not recognized under income tax laws.

  • All the assets will be in the name of HUF and are assets of the whole family & not of a specific individual. Therefore, the common property or asset cannot be sold without the consent of all members of HUF. Over the years this has clause has led to many disagreements which have eventually landed up in court. When the number of members rises in an HUF, it is extremely difficult getting unanimous consensus on any matter. Moreover, with divorce rates and the concept of nuclear families on the rise the entire management of HUF becomes difficult.
  • HUF cannot make any gift of HUF property to coparcener and non-coparceners. Any gift made by the HUF are void-ab-initio.

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