Hindu Undivided Family (HUF)

Hindu Undivided Family (HUF)

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What is HUF

 

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.

 

 

 

How and When is HUF created

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.

 

 

Formation of HUF

Following three steps are required in the formation of HUF:-

  1. Creating HUF Deed
  2. Applying for HUF PAN Card
  3. Opening Bank Account of HUF

 

1. HUF Deed

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 –

  1.  Karta has the authority of the accounts vested in his hand
  2.  That the members are the only members of the HUF
  3.  The Karta holds the right to govern all the transactions of the HUF accounts on behalf of the members.

 

Further, following details are mentioned in HUF Deed:-

  1. The names of the members of the HUF and the name of the HUF
  2. The capital with which the HUF has to be initiated

 

2. Applying for HUF PAN Card

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.

 

3. Opening Bank Account of HUF

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.

 

 

Taxability of HUF

  1. An HUF is taxed on same slab rates which are applicable to an Individual.

 

  1. An HUF is liable to pay Alternate Minimum Tax if the tax payable is less than 18.5 per cent (including cess and surcharge) of "Adjusted Total Income" subject to prescribed conditions.

 

 

  1. An HUF is entitled for deductions available under Chapter VI-A while calculating its taxable income.

 

  1. HUF is also required to file Income Tax Return every year just like an Individual.

 

 

  1. Tax audit under Section 44AB is required to be conducted by a Chartered Accountant if the turnover of the business of the HUF is more than prescribed threshold limit.

 

  1. Due Date of filing of Income Tax Return of the HUF would be 31st July of the Assessment Year. In case of tax audit, the Due Date of return filing would be 30th Sept.

 

 

  1. The HUF may be a resident or a non-resident in India depending on where the control of the HUF is residing.

 

  1. HUF can pay salary to its members if they are contributing to its functioning and work of the joint Hindu family business. This salary expense can be deducted from the income of HUF.

 

 

  1. Deductions under Section 80 and other exemptions can be claimed by the HUF in its income tax return.

 

 

 

 

Determining the Income of HUF

The following points should be kept in mind while computing income:

  • If funds of an HUF are invested in a company or a firm, fees or remuneration received by the member as a director or a partner in the company or firm may be treated as income of the family.

 

  • However, if fees or remuneration is earned for services rendered by the member in his personal capacity, it will be treated as the personal income of the member.

 

 

  • If any remuneration is paid by the HUF to the Karta or any other member for services rendered by him, remuneration is deductible from income of HUF if such payment is genuine and not excessive and paid under a valid and bona fide agreement.

 

The following receipts are excluded from income of HUF:-

  • Income from self-acquired property of a member transferred without adequate consideration to join family property.

 

  • Income of impartible estate.

 

 

  • Personal income of the members.

 

  • "Stridhan" is absolute property of a woman, hence income arising therefrom is not taxable as income of HUF.

 

 

  • Income from individual property of daughter is not taxable in hands of HUF even if such property is vested into HUF by daughter.

 

 

Drawbacks 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.

 

 

 

Benefits of HUF

  • Family income can be split by getting a PAN card for HUF which would thereby result in tax saving and reduction of tax outgo.

 

  • As a new PAN Card would be allotted to the whole family, it will enjoy the benefits of Income Tax Slab Rates i.e. Income would be Tax Free up to the specified limits and would then be taxed progressively at 10%, 20% & 30% resulting in tax saving.

 

  • An HUF is taxed separately from its members. Therefore, deductions (such as under Section 80) or exemptions allowed under the tax laws can be claimed by it separately.

 

 

Some FAQs

 

What all religions form an 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.

 

Who is Karta?

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.

 

Who are co-parceners?

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.

 

Are wives and daughters included in 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.

 

Are Jain and Sikh families also governed by Hindu Law?

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

 

What is meant by Ancestral Property?

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.

 

What is meant by “Partition”?

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.

 

Other Income Tax Provisions

  • As per Section 56(ii) of the Income Tax Act, gifts received from the relatives of the members of HUF are fully exempted from the levy of tax.

 

  • Gifts received at the time of marriage of any member of the HUF 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.

 

 

  • Ancestral property belongs to the whole family i.e. the HUF.

 

  • If the aggregate value of gifts received from any person during a financial year does not exceed INR 50,000, then this whole amount is exempted from levy of any tax. There is no limit on gifts received from family members and this limit of INR 50,000 is only for gifts received from non-relatives.

 

  • If a gift is received from members of the HUF, then the income generated from these funds would get clubbed and taxed in the hands of the member making the gift. However, income generated from income won’t get clubbed.