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HUF and its Benefits

HUF stands for Hindu Undivided Family. Under Hindu law, a Hindu Undivided Family is a family that consists of all the people lineally descended from a common ancestor. It cannot be created under any contract but is automatically created in a Hindu family.

The members of a Hindu family can come together and save an ample amount of tax by creating an undivided family. Some rules and regulations are required to be followed by HUF. Many Hindu families are not divided yet; thus, their income is considered joint income. Therefore HUF imposes a tax jointly; however, no tax is imposed on any specific individual.

What is HUF?

Hindu Undivided Family consists of all the members who are directly from the common ancestors and the daughters and the wives of the male descendants. The HUF has its Permanent Account Number (PAN) and can file tax returns independent of its members.

HUFs are generally headed by a Karta, the family’s eldest member. The other family members are known as coparceners. The Karta manages the day-to-day affairs of the family. Once the daughter gets married, she becomes a member of her husband’s HUF and continues to be a coparcener of her father’s HUF.

HUF is recognised all over India except Kerala.

Creation of Hindu Undivided Family (HUF)

One of the most important reasons to form a Hindu Undivided Family is to get tax benefits.

Requirements to form a Hindu Undivided Family are:

  • Hindu Undivided Family can only be formed by all the members of a family. No individual can form a HUF.
  • A newly added member to the family automatically becomes a member of the HUF.
  • HUF generally consists of a common ancestor and all his descendants, including their daughters and wives.
  • Only Buddhists, Hindus, Sikhs and Jains can form HUF.
  • HUF consists of assets that come as a will, gift or ancestral property.
  • After creating the HUF, it’s essential to create a bank account in the name of the HUF. After opening a bank account, a PAN number will be generated in the name of the HUF.

Ancestral Property

Ancestral Property is the property that a man inherits from his last three male ancestors—his father, grandfather and great grandfather. Thus, the inherited property from any other relationship is not ancestral. The following families hold income from the ancestral property that is taxable as income of HUF:

  • A family of widow mother and sons (maybe minor or major)
  • Family of husband and wife, having no child
  • Family of two widows of deceased brothers
  • Family of two or more brothers
  • Family of uncle and nephew
  • Family of mother, son and son’s wife
  • Family of a male and his late brother’s wife.

Advantages of Creating HUF

Following are the advantages of the Hindu Undivided Family:

  • The head of the HUF has all the power in their hand.
  • An adopted child can also become a member of the HUF.
  • The head can sign relevant documents on behalf of the other family member.
  • The head has the right to permit any other older member of the family to carry out the activities.

Disadvantages of Creating HUF

Following are the disadvantage of the Hindu Undivided Family:

  • Same rights: Every member has the same right to every family asset. Thus, the common property cannot be sold without getting the consent of all the family members of the HUF.
  • Partition: Closing the HUF is the most challenging task to be performed once the members of the HUF have decided to part ways. Even the partition of a small family group leads to the dissolution of the HUF. After the closing down of the HUF, the assets of the family are distributed among all the HUF members.
  • Joint family losing relevance: In the present scenario, when everyone thinks about themselves first, the family is not the priority. The joint family is losing its relevance, as there are cases where the members of HUF fight over petty issues or about the property.
  • Increase in the number of family members: The birth and marriage increase the number of members of the HUF family.

    When the property is divided among the members, then with the increase in the number of members, the property gets divided into small units, which is an ultimate disadvantage to the members of the HUF

Assessment of HUF

The income of HUF is assessed by satisfying the following two conditions:

  • Existence of common property in the HUF: The common property consists of the ancestral property inherited from the male ancestor. Additionally, the property acquired by an individual from his sources is incorporated into the Hindu Undivided Family.
  • Existence of Hindu Coparcenary: The person who can claim the share in the undivided family upon Partition, such person is known as the Coparcener.

The HUF’s income can be assessed only by the HUF and cannot be assessed by any of its members unless specifically provided. The income tax liability in the case of the HUF depends upon the residential status.

A HUF can be a resident or an ordinarily resident in India, a resident but not ordinarily resident of India or a Non-Resident Indian.

The HUF can gift the property of the HUF neither to its coparcener nor to anyone else. A gift made by the HUF is considered void-ab-initio.

How is HUF taxed?

  • HUF has its PAN and can file a separate tax return. A separate joint family business is created since the HUF has its own identity, which is separate from its members.
  • HUF can take an insurance policy during the lifetime of the member.
  • HUF can also pay the salary to its member if they contribute to the functioning of the HUF. The salary expenses can be deducted from the HUF’s income.
  • Investments can be made from the HUF’s income. Any returns from such investments are taxed in the hands of the HUF.
  • A HUF is taxed at the same rates as an individual.

How to save tax through HUF?

HUF is recognised as a single entity under Income Tax Act. The primary reason to build a HUF is to get an additional PAN Card that would be legally acceptable to the avail tax benefit. It also has a permanent account number.

The permanent account number of a HUF is different from the permanent account number of the individual members of the family. The member of the HUF will not have to pay taxes individually, and the HUF pays the tax using the new PAN Card of the HUF.

The HUF is entitled to use the PAN Card to file the ITR. If the annual family income exceeds the prescribed limit, the family will get taxed at 10%, 20% and 30% of the income.

The HUF is entitled to file separate tax returns under the said PAN. The advantage of a HUF is that the contribution to the capital assets of the HUF is counted separately from the income of the individuals. Thus, the tax burden of the individual is minimised.

Partition of HUF

Partition means a division of property. When the property is capable of a physical division, each member’s share is determined by making a physical division of the property. Only the coparcener of the undivided family can claim for partition. According to Hindu law, a full or partial partition of HUF assets is possible.

Though only coparceners can claim for partition, the following persons are also entitled to their share in the property:

  • A son in the mother’s womb at the time of partition;
  • Mother (gets equal share if there is a partition between sons after father’s death)

Types of partition

  1. Partial partition

    Under the partial division, the assets possessed by the HUF are not dispersed equally among the members.

    A partial partition occurs when a division of all assets is made concerning some members, and the rest members remain members of the HUF.

  2. Total partition

    When all the assets are divided among all undivided family members and the HUF ends, it is a total partition.

Assessment after partition

Once the joint family income is assessed as the income of the HUF, it continues to be assessed similarly until one or more coparcener claims the partition. However, it is essential to claim for partition before the relevant assessment year.

The assessing officer, on the claim receipt, enquires only after giving due notice to the members and records a finding whether there has been a partition and, if so, what’s the partition date.

The family’s income from the previous year’s first date till the partition’s date is assessed as the income of the HUF. However, the income from the property subject to the partition is assessed as the individual income of the recipient member.

Once the recipient member forms another HUF along with his wife and son(s), the property’s income that was subject to partition gets taxable to tax in the hands of the new HUF.

Partition and Income Tax Act

Under Section 2(31) of the Income Tax Act, 1961, Hindu Undivided Family is considered a ‘person’. Thus, forming a separate legal entity. Although, the concept of partition is similar to Hindu law and the Income Tax Act. However, the concept of partition recognition under tax laws differs from that of Hindu Law.

  • To recognise partition under Hindu Law, the division of properties by metes and bounds is not necessary. But for recognition of partition under tax laws, the division of properties by metes and bounds is necessary.
  • Under Hindu law, the partial partition is recognised; however, section 179(9) of the Income Tax Act, 1961 does not recognise the partial partition.
  • Although there is no absolute restriction for partial partition under the Income Tax Laws, the law does not recognise partial partition.

    When a partial partition occurs, tax law treats it as if no partition occurred, and revenue from the assets transferred is taxed in the hands of the HUF, even though the income may be enjoyed by the persons who got the asset through the partial partition.

    Even if the HUF is fully partitioned, you must make an application to the assessing officer for an order recording the full partition.

  • After the full division, the clubbing provisions will no longer apply to income derived from assets previously transferred to the HUF by a member. But they will continue to apply to the share of assets given to the spouse of the members who had transferred such assets to the HUF.

Who can ask for partition of HUF Assets

The coparceners have the right to seek a partition or file a partition suit. However, the members are not entitled to seek partition simply but can get a share of HUF property if the partition occurs.

All the members of the HUF are considered coparceners. The Karta has no right to take away the right of the coparcener, and the assets are equally divided between the Karta and co-parceners. If any coparcener requests the division of HUF assets, the Karta must grant the coparcener’s share.

The partial division will emerge from such conditions. However, only the adult co-parcener is entitled to the right to request the division and to start a lawsuit to divide HUFs assets.

A minor is not entitled to make such claims. However, the claim can get filed on their behalf if the property is illegally alienated, damaging the child’s interests.

Important judgement

Vineeta Sharma v. Rakesh Sharma

The case interprets the amended Section 6 of the Hindu Succession Act, 1956. There were two different views of judges in the case. Thus, a reference was made to a larger bench to interpret the said provision.

An issue in the case

  • Whether the interpretation of Section 6 of the Amendment Act, 2005 valid?
  • Whether the amendment is retrospective, retroactive or prospective?

Held

The provisions of Section 6 of the Hindu Succession Act. 1956, confers the coparcener’s status on the daughter born before or after the amendment. This right is similar to the rights and liabilities of the son.

The rights that a daughter can claim who is born earlier with effect from 09.09.2005 and the saving clause provided under Section 6(1).

So, the amendment in section 6 is completely valid, having a retrospective effect.

The coparcenary’s right is created by birth, and the father coparcener doesn’t need to be alive as on 09.09.2005.

Conclusion

The HUF or Hindu Undivided Family is created when the Hindu family members come together. It is not a contractual formation but a general formation that comes into existence when the members of the family desire so and work together.

The most significant advantage of the formation of the HUF is the tax benefits that come with the formation of HUF. It comes with two benefits: its easy creation and the tax benefits.

However, every aspect of HUF comes with its advantages and disadvantages. The major drawback of the HUF is that it is difficult to dissolve, and the occurrence of partition is the most challenging stage in the life of the Hindu Undivided Family.

Earlier, only the male members had the right to be the coparcener in HUF and avail benefits whereof. However, as Indian Judiciary always plays a vital role in uplifting society. Similarly, the change has been brought by the Indian Judiciary by giving the right of the coparcener to the daughters as well.

FAQs

What is a Hindu Undivided Family?

A Hindu undivided family is an entity in which the Hindu family members come together to form a single entity.

What are the benefits of HUF?

The two-fold benefit of HUF is its easy creation and the tax benefits. One becomes a member of the HUF by birth, and there is no limit to the minimum or a maximum number of members.

Who is Karta of a HUF?

The head of the HUF is called the Karta and is generally the senior-most male member of the family.

What is Ancestral Property?

Ancestral Property gets defined as the property that a man inherits from his male ancestors.

What is Partition of HUF?

Partition means the division of the property. In the case of HUFs, the coparceners can only claim for partition.

About Author

Anshita Surana, born in the year 1999 in Guwahati, Assam and brought up in Hanumangarh, Rajasthan, where I completed my elementary and secondary education from the CBSE board.

Currently, Pursuing B.B.A.LL.B(H) from K. R. Mangalam University, Gurugram.

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