HUF stands for Hindu Undivided Family. In this tax structure, income earned belongs to the whole family and not to any specific individual. As the Income is being generated in the hands of the whole family, it is taxed in the hands of the HUF. Therefore HUF is considered as a separate entity for the purpose of Income Tax Act and the HUF has a separate PAN Card and a separate income tax return is filed for the same.
Hindu Undivided Family (‘HUF’) is treated as a ‘person’ under section 2(31) of the Income-tax Act, 1961. HUF is a separate entity for the purpose of assessment under the Act.
A HUF automatically comes into existence when a person gets married and starts his family. The day when boy and groom get married, they have formed a HUF. However, for the purpose of banking and income tax matters, one must have a written agreement called HUF Deed.
Following three steps are required in the formation of HUF:-
The HUF Deed is a written formal document on a Stamp Paper stating the names of the Karta and the Co-parceners (Members) of the HUF. The eldest male member of the HUF becomes the Karta of the HUF. A declaration is also provided by each member of the family where they declare the name of Karta and also state that –
Further, following details are mentioned in HUF Deed:-
As HUF is treated as a separate entity different from its members, it is required to apply for a separate PAN Card. An application for HUF PAN Card is required to be made in Form 49A which can be furnished online as well as manually. HUF PAN Card Application can be made online on NSDL.
An HUF is required to file separate Income Tax Returns on allotment of PAN Card and can thereafter claim benefit of income tax slab rates and also claim most of the income tax deductions which are available to an Individual. The application for PAN Card and the Income Tax Return are signed by the Karta.
A HUF is required to open a Bank Account for its receipts and payments. It can be opened in any bank account. A Rubber Stamp of the HUF is also required at the time of opening of HUF Bank Account for creation of HUF, and all documents pertaining to the HUF should be properly stamped. This rubber stamp should be rectangular as Round Stamps are now not accepted (RBI Circular).
On completion of above 3 steps, i.e., HUF Deed, PAN Card, Bank Account. The HUF becomes a separate legal entity. That would mean that payments and the amounts received in the name of the HUF will not be taxed in the hands of the individual members of the HUF.
The following points should be kept in mind while computing income:
The following receipts are excluded from income of HUF:-
Members having equal rights–Members have equal rights on the property in an HUF. The common property can be sold only with the consensus of all the members. Any additions to the family, by way of birth or marriage, become a member of the HUF and get equal rights.
Partition – Closing off HUF is not an easy task. The only way an HUF can be dissolved is by a partition. All members have to agree to dissolve the HUF. Under a partition, assets are distributed to members which can lead to a lot of disputes and can be a lot of legal hassle.
Losing relevance of Joint family system –Nuclear families are the norm these days, hence HUF is losing relevance. Several cases of disputes among couples or families have come forward. Families are fighting on common household expenses, rather than pooling assets and creating synergies. Divorce rates are rising and hence, HUF as a tax vehicle is losing importance.
HUF continues to be assessed as such till partition – Unless a partition takes place, one must continue to file its tax returns. Any claim for partition is supposed to be made to the assessing officer. On receiving such claim, the assessing officer will make an enquiry after giving due notice to the members. Income from the property once partitioned is taxed as individual income of the member. If the member forms another HUF with his wife and children, the income of the property which was transferred from the original HUF is taxed in the hands of new HUF.
As HUF stands for Hindu Undivided Family, individuals belonging to other religions are not allowed to form HUF’s except Jain and Sikh who can create HUF even though they are not governed by the Hindu Law.
Karta is generally the father of the family who has the right to do all the things for the family and takes all the decisions on the behalf of the family.
Coparcener is the person who has the right to demand the share of the property of family if he/she wants to part away with the family with his/her share. Not all members of the HUF are its coparceners. The co-parcenery extends to four levels down the family hierarchy in the following manner:
1st level: Holder of ancestral property for the first time.
2nd level: Sons and daughters
3rd level: Grandsons.
4th level: Great grandsons.
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.
Jain and Sikh families even though are not governed by the Hindu Law, but they are treated as HUF under the Income Tax Act.
Ancestral property may be defined as the property which a man inherits from any of his three immediate male ancestors, i.e. his father, grandfather and great grandfather.
Partition means division of property. Where the property is capable of admitting a physical division, share of each member is determined by making physical division of the property. On the other hand, where the property is not capable of physical division, partition shall mean such division as the property may admit.