Saturday Brain Storming Thought (111) 01/05/2021


Hindu Undivided Family (HUF)

HUF is treated as a person under section 2(31) of the income tax act 1961

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

HUF is a separate entity for the purpose of assessment under income tax act

A HUF cannot be created under a contract

HUF is created automatically in a Hindu family

Difference between HUF and individual

The individual is a person who holds self-acquired property and having the right to ancestral property

HUF is the sum of all ancestral property that you acquire by virtue of being born in that family

HUF and its benefits

By forming HUF, you can optimise your tax liabilities and also include your family members to benefit in the future

For the sake of income tax, the HUF is considered as a separate entity and taxed seperatly

who comes under HUF

HUF consists of the karts, who is typically eldest person or head of the family, while other family members are coparceners

Can a husband and wife form HUF

To create HUF, at least two coparceners are required either son or daughter

Therefore only husband and wife cannot create HUF, unless the property has been received by a coparcener on partition or otherwise

How HUF can earn income

The entity is allowed to earn from all legimate ways except by way of salary

It can engage in business, investing in real estate and market linked options such as shares, earn income through rent etc

The HUF should file for ITR and income earned would be taxed as per the slabs

Can a person be member of two HUF

It is no longer to create multiple HUFs

It is possible to have a separate HUF with father as the karta, and another HUF with the son or sons as karta or even with daughters in view of the amendment made in Hindu succession law

Cash deposit in HUF account

You can deposit up-to Rs 3 lakh in to your HUF account and no tax liability will be there on HUF

Rs 2 lakh tax exemption limit and Rs 1 lakh investment by HUF under section 80C

death of karta of HUF

When karta of the HUF dies, the next senior male member takes over as karta

As per Hindu succession act 2005, the daughters of a family who are governed by mitakashara law, also become co-parceners in the HUF property

HUF regiatration

Once a HUF formed it must be registered in its name

A HUF should have legal deed

A pan number and a bank account should be opened in the name of HUF

Can HUF gift immovable property to its member

In normal conditions HUF cannot gift any asset to any of its members

HUF can sell/transfer it’s property to anyone including its member, but that would not be feasible

HUF nomination

Nomination cannot be done in an HUF account

After the demise of the karta, the next senior most coparcener becomes new karta of the HUF and manages the affairs of HUF

married daughter member of HUF

After marriage, a daughter will cease to be a member of her personal HUF, but will continue to be a coparcener

Married daughter is entitled to ask for partition of the HUF property, as well as to become the karta of the HUF, in case she happens to be eldest coparcener of her father’s HUF

HUF and PPF account

HUF is not allowed to open the PPF account as per the PPF scheme

money withdraw from HUF account

Karta can withdraw the money from HUF account

But the other coparners obtain court injunction provided that they can substantiate that the karta wants to convert HUF property to his personal property

liability in HUF

The liability of the karta is unlimited because he is the only deciding authority

The liability of co-parceners is limited up-to their share in the capital of the family

Sharing of profit and losses in HUF

According to Hindu succession act 1956, all the members of HUF have equal rights to share the profits as well as losses of the business

The control of the family lies with the karta

Karta takes all the decision and authorizes to manage the business

Continuity and stability in HUF

This organization enjoys long and stable life as it is not affected by death, insolvency, insanity of any of its member

Minor members in HUF

The inclusion of an individual into the business occurs due to birth in a HUF

taxation benefits in HUF

1) tax incidence can be lowered by considering effective tax planning under HUF structure

2) HUF member cannot be taxed in respect of any sum which he receives as member out of family income

3) there may be several items of fully exempted such as agricultural income, dividend income etc which could be planned for the each of family member and also for the HUF to secure high level of zero income tax for family

Advantages of HUF

1) ease of formation

2) continuity of operations

3) effective control

4) increased loyalty and cooperation

5) equal sharing of profits and losses

6) tax benefits

7) credit worthiness more than sole proprietorship

8) cannot sue or be sued

Disadvantages of HUF

1) confined to joint Hindu families

2) relatively limited capital

3) limited managerial talents

4) unlimited liability of karta

Types of school of Hindu law

1) Dayabhaga school

a) prevails in Bengal and Assam region of india

b) property passes by inheritance only and may go to female heirs like widows, daughters etc

2) Mitakshara school

a) property devolves on the male survivors only

b) prevails in other parts of India

Business secrecy in HUF

1) the business secrets are known to the co-parceners in general and karta in particular

2) it is not obligatory for them to publish their accounts, which results in great deal of privacy and secrecy

Possibility of unmarried karta in HUF

No, an unmarried cannot form a HUF of which he seeks to be the karta of HUF

Unmarried can be the member of the HUF of his father or grandfather, but to create his own HUF, he has to wait till he gets married

Possibility of all female HUF

Yes, where a couple has only a daughter and the husband passes away, the mother-daughter can continue the HUF

It has been held by Allahabad high court in CIT Vs Saran Kumar 13 ITR 361 (all) that there can be an HUF consisting of female members

Possibility of female as a karta in HUF

No, as per Hindu succession act 2005

An unmarried daughter, in the unfortunate event of her father passing away will become karta of HUF if she has no brother

Partitioned of HUF

1) Yes, the HUF can be partitioned

2) this is actually a division of property where the share of each member is determined

3) any coparcener can enforce the partition of HUF and then the share will be divided between

a) all coparceners

b) a son in the womb of his mother at the time of partition

c) mother – gets an equal share if there is a partition between the sons and her husband has passed away

d) wife – gets a share equal to that of a son at the time of partition between father and sons

4) income tax act does not recognize partial partition

5) so there should be complete partition of HUF

6) as per Hindu law, the ordinary rule that partition can be claimed by a coparcener, as wife not being coparcener hence she can not ask for partition

change of name of HUF

Change in name can be applied for an update of your records with the income tax authorities

However pan number of HUF remains same

Features of HUF account

1) every member of the family can deposit their income in the common corpus

2) single persons authority while participation from entire family

3) tax benefits on deposits under various sections

4) corpus can be divided only on agreement of every coparcener of the family

Documents required for opening of HUF account

1) pan card with name if karta

2) a declaration form where every member has to signed stating name of karta and declare

3) they are the only members of HUF

4) karta to have some authority over HUF account

5) every transaction on behalf of HUF account, made by each member of the family is governed by karta

6) residential proof of karta

7) identification proof of karta

8) apart from the points mentioned above there can be other documents or conditions depending on the bank where HUF account is to be opened

Ways to reduce taxes by HUF

1) rental income from property

2) business income

3) remuneration to karta and members is allowable deduction from income of HUF

4) Loan to HUF membere

5) family settlement or arrangements

HUF is easy to make but difficult to break

Compiled by:-

Avinash Kulkarni

Chartered Engineer
Govt Regd Valuer
IBBI Regd Valuer