HINDU UNDIVIDED FAMILY (HUF)

Saturday Brain Storming Thought (251) 30/11/2024

HINDU UNDIVIDED FAMILY (HUF)

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 Entity

1) Hindu Undivided Family (HUF) is treated as a person under section 2(31) of the income tax Act 1961

2) HUF is a separate entity for the purpose of assessment under Act

3) An HUF cannot be created under a contact

4) HUF is created automatically in a Hindu Family

5) Jain and Sikh families even though are not governed by the Hindu Law, but they are treated as HUF under the Act

HUF Account Eligibility

All individuals belonging to a Hindu Family, including husbands, wives, children, their respective spouses, and their offspring are eligible to be included in HUF

In HUF, the mail family members are referred to as coparceners, while the female family members are simply treated as members

The right to request a division of the HUF is exclusively reserved for coparceners

HUF Account Rules

Terms and conditions required to create HUF are

1) HUF should only be formed by a family

2) HUF is automatically created for the newly added member of the family at the time of their marriage

3) HUF, in general, consists of a common ancestor and all of his descendants, including their daughters and wives

4) Buddhists, Hindus, Sikhs and Jains can form HUF

5) HUF often has assets which come as a will, gift or ancestral property

6) Once the HUF is created, the bank account should be created in the name of HUF

7) A Pan number will be generated in the name of HUF

8) Every member of the family can deposit their income in the common corpus

9) Tax benefits are applicable on deposits under various sections

10) Corpus can be divided only on the agreement of every coparcener of the family

Steps to form HUF

Conditions to form HUF are

1) Family Members

One person cannot form HUF

It can only be formed by a family

A HUF consists of a common ancestor and all his lineal descendants including their wives and unmarried daughters

2) Eligibility

Hindus, Buddhists, Jains and Sikhs

3) Formation

A HUF is created at the time of marriage

It includes the husband, wife and their children

4) Assets

HUF usually has assets which come as a gift, a will or ancestral property, or a property acquired from the sale of joint family property or property contributed to the common pool by members of HUF

5) Registration

Once an HUF is formed, it must be formally registered in its name

6) Legal Deed

A HUF should have a legal deed

The deed shall contain details of HUF members and the business of the HUF

7) Pan Number

A Permanent Account Number (PAN) must be obtained in the name of HUF

8) Bank Account

A bank account should be opened in the name of HUF

Karta as per HUF

The Karta is the head or leader of the HUF

Karta is the oldest member of the family

Karta can be Male or Female

Karta should be of sound mind, having attained the age of 18 years (i.e Major) and are qualified legally

Tax Implications of being a Karta

1) Filing income tax on behalf of HUF

2) Claiming tax deductions

3) Handling tax disputes

4) Karta must ensure tax compliance and timely payment of all taxes

Role of Karta as per HUF

1) Managing property

2) Distributing income

3) Managing debts and liabilities

4) Representing the family in legal matters

5) Making decisions on behalf of the family

Dayabhaga System for HUF

1) Under the Dayabhaga system, the father is the sole owner and the exclusive possessor of the joint family property

2) No member can enforce the partition of HUF so long as the father lives

3) The Dayabhaga law is prevalent in West Bengal and Assam

Mitakshara System for HUF

1) The Mitakshara law stipulates that the property vests in the HUF itself and not in any individual member of the family

2) HUF can be partitioned within the lifetime of the father

3) Hindus in the rest of the country are governed by the Mitakshara law (except West Bengal and Assam)

Formation of HUF

1) To form HUF, one has to get married

2) There has to be a minimum of two people to constitute a family

3) The husband and wife together make up a family

4) They don’t have to wait till they have a baby to constitute their HUF

5) An unmarried cannot form a HUF

HUF Consists of

1) Karta

The oldest male in the family

If he passes away, his wife can become Karta

His eldest son will take his place

If he chooses not to become Karta, he can give up his right and the next son in line can take his place

2) Coparceners

This is what all the male members are referred to as

Sons, grandsons and great-grandsons of the holder of joint family property, by virtue of their birth, they acquire an interest in the property

3) Members

The female members are simply called members

Daughter can act as Coparcener

On 09/09/2005, The Hindu Succession Act, 1956, was amended to provide that

1) A daughter too could be a coparcener i.e. joint heir, like her brother to the joint family’s assets and

2) She too could enforce the partition of the family property to claim her individual share

3) She continues to be the coparcener in her father’s HUF even after she gets married and forms another HUF with her husband

All female HUF possibility

Yes, there can be

Where a couple has only a daughter, and husband passes away, the mother-daughter duo continue to HUF (although a problem may arise after the daughter gets married and becomes a member of her husband’s HUF)

Allahabad High Court in CIT v Sarwan Kumar 13 ITR 361 (All), that there can be an HUF consisting of female members

Can a female be the Karta

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

HUF Income

1) Since the HUF is a separate entity, it can earn income from all the above except income from salary

2) All income that arises on the investment of the HUF’s funds and utilisation of its assets is regarded as income and is separately assessed and taxed

Capital Creation for HUF

1) Gifts received from the members of HUF are not taxable

As per section 56(ii) of the Income Tax Act, such gifts do not attract any tax and are fully exempted

2) Gifts received at the time of marriage are fully exempted from the levy of income tax

However, gifts received at the time of marriage of daughter are not exempted and are taxable

3) The ancestral property can be transferred to the HUF to create capital of HUF

4) Aggregate Value of gifts received from non-relatives during a financial year does not exceed Rs 50,000, then whole amount is exempted from levy of any tax

There is no limit on gifts received from family members

5) Gifts received from members of HUF, then the income generated from these funds would get clubbed and taxed in the hands of the member making the gift

Income generated from income won’t get clubbed

Sources where a HUF can earn more income are

1) Through any business

2) Investing in Shares and Mutual Funds

3) Investing in Real Estate

4) Investing in Fixed Deposits

5) Through Rental Income

6) Various other sources

Tax audit under Section 44AB of IT Act

Turnover above Rs 50 Lakhs for Professionals

Turnover above Rs 1 Crore for Businessman

Documents required for opening HUF Account

1) A declaration form will be provided where every member has to make a signature stating the name of Karta and declare

a) They are the only member of HUF

b) Karta to have sole authority over HUF account

c) Every transaction on behalf of the HUF account, made by each member of the family is governed by Karta

2) Residential proof of Karta

3) Identification proof of Karta

Features of HUF Account

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

2) Single person’s 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

HUF Tax Benefits

1) According to IT Act, tax rebates and deductions can be availed under section 80C for HUF Account

2) Gifts collected up to a worth of Rs 50000 will be tax free

3) Father of HUF account can gift a property or money to a son who owns a smaller HUF Account

4) If father donated to sons HUF Account is tax free under section 64(2) and 56(2)

5) Corpus can be used for investment in tax free money instruments

Disadvantages of HUF Account

1) There can be a strong sense of insecurity among members that can keep the corpus of the account empty and as long as cospus is empty the account is non-functional

2) If any of the members of HUF is willing for a partition then the process of partition in deposit in HUF Account can tirn to be tedious

3) Salaried individuals cannot divert their salary into the HUF account

Ways to reduce tax outgo with an HUF Account

1) Rental Income from property

Rental income from a property could be received on behalf of a HUF instead of an individual account

2) Business Income

Profits generated out of the family business, in the name of HUF, shall be taxed accordingly and exemptions will give more leverage on tax saving

3) Remuneration to Karta and members

Remuneration to Karta and members is an allowable deduction from income of an HUF

4) Loan to HUF members

The HUF may or may not charge on the loans given

5) Family settlement or arrangement

Family settlement should be to settle existing or future disputes regarding property amongst members of family

Since this arrangement does not involve transfer, it would not attract gift tax, capital gains

Income Tax rate for HUF

1) Upto Rs 3 Lakh – Income tax slab – Nil

2) Above Rs 3 Lakh & upto Rs 6 Lakh – 5%

3) Above Rs 6 Lakh & up to Rs 9 Lakh – Rs 15000 + 10% above Rs 6 Lakh

4) Above Rs 9 Lakh & up to Rs 12 Lakh – Rs 45000 + 15% above Rs 9 Lakh

5) Above Rs 12 Lakh & up to Rs 15 Lakh – Rs 90000 + 20% above Rs 12 Lakh

6) Above Rs 15 Lakh – Rs 150000 + 30% above Rs 15 Lakh

Tax exemption limit for HUF

Upto Rs 3 Lakh

To save tax on salary using HUF

HUF can pay salaries to their members / coparceners if they contribute to its functioning

The salary expense can be deducted from the HUF’s income and thus claimed as a tax benefit

HUF Checklist

1) HUF will need to file IT return every year

2) Any asset which is contributed to HUF account will be treated as common asset and the asset owner must renounce the ownership in the name of HUF

3) Previous owner cannot sell such asset without consensus of all HUF members

4) Any addition to the family by birth or marriage will add a member to HUF

5) Shutting down the HUF is a difficult process

It is possible only all the HUF members agree for partition

6) Where there is no male member, female member can become Karta, but it’s tax aspects are not very clear

7) If any member of Karta transfers any property to HUF without any sufficient consideration, then it will be clubbed in the hands of such transferor

8) Where any woman has any wealth which she bought in from her maiden home, the income from the same would not ve taxable as income of HUF, rather in hands of such wealth owner

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