This article is written by Shruti Pandey, a student of Campus Law Center, Delhi University.
What is Hindu Undivided family (HUF)?
The term ‘Hindu Undivided Family’ has not been defined under Income Tax Act. It is defined under the Hindu Law as a family that consists of all persons lineally descended from a common ancestor, including wives and daughters. HUF’s are recognised all over the India except Kerala where it was derecognized by the Kerala Joint Family system (Abolition) Act, 1975. After 2005 amendment, married daughters are also the members of HUF and have rights as that of a son. An adopted child can also become the member of HUF (but he cannot ask for the partition of HUF).
HUF is purely a creature of law and not acts of parties, this means that the membership of a HUF does not come from a contract but from status of the person in such families. A HUF cannot be formed by a group of people who do not constitute a family. Lineal descendents with a common ancestor is a must.
Karta manages the affairs of the Hindu Undivided Family. Normally, the senior- most member of the family is the karta. However, a junior male member can also act as karta with the consent of the other members. When an existing HUF is reduced to only female members, one of the females as karta. This is in view of the existence of a potential coparcener by adoption. If the sons are minors, the widow of the deceased karta or a female member of the HUF can act as karta of the HUF and deal with the properties of the HUF.
HUF for tax benefit
A Hindu Undivided Family (HUF) offers specific advantages as far as taxation is concerned. The Income Tax Act and Wealth Tax Act recognise the HUF as an independent assessable or taxable entity. Hence, HUFs enjoy all deductions and exemptions under the IT Act independent of the income and tax liabilities of its members. An HUF has a separate PAN and the karta must apply for one. The PAN needs to be quoted while making investments and carrying out financial transactions of the HUF. Also, the karta must file the income tax and wealth tax returns on behalf of the HUF, in addition to his personal tax returns.
What assets can be regarded assets of HUF?
- Assets received on the partition of a larger HUF of which the coparcener was a member, like an HUF in which the coparcener’s father or grandfather was the karta.
- Assets received as gifts by the HUF. Such gifts could be received from close relatives or close friends.
Where a gift in cash or in kind, it might be taxable in the hands of the HUF. If the donor gifts movable or immovable property for less than its market value to the HUF, the HUF has to pay taxes on the deemed fair value of the gift.
Previously, cash gifts under Rs. 50,000 were tax free. If the gift was more than Rs. 50,000, then the entire amount was taxable. Now, any gift received either in cash or in kind of a value more than Rs. 50,000 is taxed in the hands of the HUF as Income from Other Sources. However there are some exceptions that the gifts from relatives of members of the HUF are exempt from this rule. Relatives here includes the Spouse of the donee, Spouse’s brother or sister, Brother or sister of the donee, Spouse of brother or sister of the donee, Donee’s parent’s brother or sister, Donee’s parent’s brothers or sisters spouse, Lineal ascendant or descendent of the donee or donee’s spouse.
Gifts at the time of marriage are exempt from tax, whether from a friend, relative or colleague. Hence if a member of the HUF is getting married, the gift can be made to the HUF, and it will be exempt from tax in the hands of the HUF.
Any income received by the HUF can be further invested into various investment avenues such as shares, mutual funds, fixed deposits, property and so on, and the profit or interest earned will be taxable in the hands of the HUF, as it is income of the HUF.
- Assets bequeathed by a will that specifically in favour of the HUF. Movable or immovable property received through a Will by way of inheritance is exempt from tax. In the absence of a will, assets received on the death of a benefactor after 1956 (when the Hindu Succession Act came into force) would not be regarded as HUF property, but as individual property.
- A member of the HUF can transfer his or her individual assets to the HUF.
While creating capital or infusing capital into HUF do not transfer your own assets or funds because any income arising from this assets or fund will be clubbed with individual income and will be taxable, therefore, such a transfer isn’t beneficial from the tax point of view.
Which income is regarded as HUF income?
Income derived from the following heads may be regarded as HUF income if the same has been classified under HUF.
- Profits from business or profession
- Income from house property
- Capital gains
- Income from other sources
Since the HUF is a separate entity, it cannot earn income from salary. All income that arises on the investment of the HUF’s funds and utilization of its assets is regarded as income and is separately assessed and taxed.
Deductions and exemptions available to HUF
HUF is entitled to a basic exemption of Rs.2, 50,000 just like a resident Indian male. Where the taxable income exceeds Rs. 2,50,000 but does not exceed Rs. 5,00,000, 10% of amount by which the taxable income exceeds Rs. 2,50,000. Where taxable income exceeds Rs. 5, 00,000 but does not exceed Rs. 10, 00,000, Rs. 25,000 + 20% of the amount by which the taxable income exceeds Rs. 5,00,000. Where the taxable income exceeds Rs. 10, 00,000, Rs. 125,000 + 30% of the amount by which the taxable income exceeds Rs. 10, 00,000.
Apart from basic exemption of Rs. 2, 50,000, a HUF is eligible to all those exemptions which are available to a male resident.
By setting up an HUF an individual divides his income between two entities which cuts down the annual tax.