Hindu Undivided Family (HUF) consists of all persons who have descended from a common ancestor. In other words, all the members of a family come together to form an HUF. Hindus, Jains, Sikhs, and Buddhists can form an HUF. The family must be living together, i.e. undivided, and share a common lineage. The minimum number of members required to form an HUF is 2. The Income Tax Act identifies an HUF as a legal entity, assessable for taxation.
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HUF - Hindu Undivided Family Act And Its Tax Benefits
Members of an HUF
All members of the family i.e. the lineal descendants of a common ancestor, their wives, sons, and daughters are members of the HUF. The head of the family, normally the senior-most male who manages the affairs of the family, is known as the Karta and all members are called Coparceners. Prior to 2005, the law stated that upon marriage, the daughter ceases to be a member of her father’s HUF and becomes a member of her husband’s HUF. An amendment to the Hindu Succession Act (HSA) in the year 2005, gave the daughter, the right to be a member of her husband’s HUF, while allowing her to continue to be a member of her father’s HUF even after marriage.
How is a Hindu Undivided Family Act formed?
An HUF is formed automatically at the time a person gets married, and cannot be created by contract. Other than a Hindu family, Jains, Sikhs, and Buddhists can also form an HUF, even though they are not governed by the Hindu Law. A single person cannot make an HUF. Once the HUF is formed, it must be registered in its name.
Documents required to form an HUF
HUF Deed - The HUF Deed is a written legal document that contains all the details of the Karta, Coparceners and the family business. It also contains a declaration by the members, that the Karta has the authority to govern the transactions and accounts of the family.
PAN Card - The family must obtain a PAN card in the name of the HUF, either online or manually.
Bank Account - A bank account in the name of the HUF must be opened, which will be used for all transactions of the HUF.
Other than the above, the following documents also need to be maintained by the HUF in its name:
- Demat Account in case it makes investments.
- Books of Accounts and documentation of all investments and expenses, which must be signed by the Karta.
- Income Tax Returns, filed separately from Karta and Coparceners.
Rights and Duties of Coparceners
- Each coparcener is entitled to joint and equal possession of the family property. If he is restricted possession and usage, he can file a court case to enforce his right.
- The members have the right to receive compensation of expenses and maintenance from the income of the HUF.
- No one is entitled to exclusive possession of any part of the family property or have any special interest in such property.
- A coparcener cannot determine his share of the HUF at any given moment, as it changes constantly with the birth and death of members. Only upon partition, can the property be divided into shares among the coparceners.
- Even though a coparcener cannot file for determining his share of the property, he can file for partition of the family property, upon turning an adult.
- If any member wants to carry out an act which may prove to be harmful to the rights of other coparceners, then he can be restrained from carrying out such an act.
- If a member wishes to sell or gift his share of the property to a third party after partition, it is null and void if other members say so. The HUF itself can obtain the property from the third party, so as to keep it within the family and restrict strangers’ access to the family property.
- A coparcener can renounce his interest in the HUF and property by stating his intention to do so, under the condition that it is in favour of at least one other member.
- In the event of death of a coparcener, his interest in the property passes, by succession, to all the other coparceners, and not to his heir. All the coparceners of the HUF have the right of survivorship in respect to joint family property.
- Every coparcener has the right to acquire property in his own name. The other members will not have any right or claim on such property, as it belongs solely to the member who has acquired it.
- The Karta has the authority to look after the affairs and manage the accounts of the family, on behalf of the other members, unless he is rendered incapable of performing his duties due to illness or any other reason.
Disadvantages of Forming a Hindu Undivided Family Act
- The assets belong to all the members and not to any single person. All the members have equal rights on the property, and this makes buying and selling of assets a very tedious process.
- As outside persons cannot be part of the HUF, it is difficult to obtain additional capital, except from banks and other financial institutions.
- An HUF can only be wound up with the consent of all the coparceners. All the members have to agree to the partition and the distribution of assets can give rise to disputes among the members.
- The Karta has all the authority to govern the transactions, investments, and accounts of the HUF. The problem with this is that even if the Karta is unsuitable for the role, he still holds the power to make decisions. Disputes can arise if the members disagree with the decisions of the Karta.
- Resources can only be brought in to the HUF through inheritance or gift. And assets, once transferred to the HUF, cannot be converted back into the name of any individual without partition.
- Once the income is assessed as that of HUF for taxation, it continues to be assessed as such every year till partition is claimed by coparceners.
Taxation of HUF
An HUF is a legal entity and is assessable for tax separate from its members. Its income is assessed under the different heads of income and taxed as per the income slab rates. A PAN Card and filing of tax returns is done in the name of the HUF. Deductions under Section 80C (to a limit of 1.5 lakh) and chapter VI A, exemptions under Sections 10 to 13A, as applicable can be claimed.
For computation of taxable income of an HUF, some important points to remember are:
- If funds from HUF are invested in a company or firm, and any fees or remuneration received by a member as a result of investment of funds, it is counted as income of the family. If, however, a member receives remuneration for services provided in his personal capacity, it is treated as the income of the individual.
- If the HUF pays remuneration to Karta or any member, for services rendered to the family, it can be claimed as deduction from income of HUF, provided such payment is genuine and under a valid agreement.
The following incomes are not taxed as that of HUF:
- If a member transfers his self-acquired property to the HUF without adequate consideration, income from such property will not be taxable in the hands of the HUF.
- Income from Impartible Estate is taxable in the hands of the holder of estate and not HUF.
- Personal income of members cannot be treated as income of family.
- “Stridhan” is property that belongs solely and absolutely to women and cannot be taxed in the hands of the HUF.
- If the daughter owns an individual property, income from such property is not taxable in the hands of HUF.
The applicable tax slabs for an HUF, for the Financial Year 2018-19 are as below:
Up to Rs 2,50,000
Rs 2,50,000 - Rs 5,00,000
Rs 5,00,000 – Rs 10,00,000
Rs 10,00,000 and above
Health and Education Cess of 4% of Income Tax.
Surcharge of 10% of Income Tax, where total income is between Rs 50 lakh and Rs 1 Crore.
Surcharge of 15% of Income Tax, where total income exceeds Rs 1 Crore.
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