All About HUF Taxation & Benefits A Hindu Undivided Family (HUF) is a unique legal and financial entity recognized under Indian Tax laws allowing it..
All About HUF Taxation & Benefits
A Hindu Undivided Family (HUF) is a unique legal and financial entity recognized under Indian Tax laws allowing it to file its own tax return and enjoy tax benefits like an individual. HUF has its own PAN.
In the case of Surjit Lal Chhabra vs CIT, by the Supreme Court clarified, that a ‘Joint Family’ and a ‘Hindu Undivided Family’ are synonymous. The court explained that a joint Hindu family are of people who are from a lineal descendant of the common ancestor and includes their wives and unmarried daughters also, and the daughters after marriage, will stop being a part of their father’s family. A married Hindu couple can establish themselves as a HUF if they receive any ancestral property.
Members: The family members are called coparceners, and they include individuals within four generations from the common ancestor.
In the case of Mrs Sujata Sharma Vs. Shri Manu Gupta & Ors (2011)., it is said by the Hon’ble Court that; The impediment which prevented a female member of an HUF from becoming its Karta was that she did not possess the necessary qualification of co-partnership. Section 6 of the Hindu Succession Act is a socially beneficial legislation; it gives equal rights of inheritance to Hindu males and females. Its objective is to recognize the rights of female Hindus as coparceners and to enhance their right to equality apropos succession.
The Supreme Court held that the daughters of a HUF can also become Karta. This led to the expansion of the rights of females under Section 6 of the Hindu Succession Act, of 1956.
The head of HUF is called Karta and Members of HUF are called by Coparceners. They are related to each other and related to the head of the family.
On the death of Karta the oldest male member will become the Karta of the family.
Coparceners: These are family members who have a right to the family property by birth. They can demand a partition of the HUF assets.
The daughter of a coparcener by birth will become a coparcener in her own right in the same manner as the son and she can also claim the partition of assets of the family.
Unmarried Daughters are also members of HUF. With effect from 6th September 2005, daughters also have coparcenary status. Only Coparceners have a right to partition. HUF May have many members but members within four generations, including Karta.
Resident: According to Section 6(2) of the Income Tax Act, 1961, HUF will be resident in India if the control and management of its affairs are wholly are partially in India.
The Karta or the manager of the family has to be resident in India for at least a minimum of 2 years out of 10 years, which is, at least 730 days or more in the preceding previous year. Also, The place where he manages and controls his HUF should be in India.
If Karta is NRI but HUF is managed from India then HUF will be resident in India.
Non-Resident: HUF will be non-resident If the control and management are wholly outside India.
Resident and ordinarily resident/ Resident but not ordinarily resident :
If Karta of Resident HUF fulfils the following conditions then resident HUF will be resident and ordinarily resident other it will be resident but not ordinarily resident.
Karta of resident HUF should be resident in at least 2 previous years out of 10 years preceding the relevant previous year.
The stay of Karta during the 7 previous years immediately preceding the relevant previous year should be 730 days or more.
Tax Deductions: HUF can claim deductions under various sections like 80C, and it can also invest in tax-saving instruments.
Any Return on the investment made by the HUF will be taxable in the hands of the HUF.
However, the following income will not be taxed as income of HUF
Create a HUF Deed: A legal document stating the names of the Karta and coparceners. It can be only created by Hindus, Buddhists, Jains and Sikh Family.
Partition under Hindu Law is classified into two methods: Total or Partial.
In total partition, all the members end up being part of the HUF and all the properties get terminated to be properties owned by the respective HUF.
The Partition is partial vis-a-vis members, some of the members are excluded on partition and the remaining members resume to be the members of the family. Sometimes, it can also be vis-a-vis properties, where some of the properties are divided within the members, and the other properties remain as the HUF properties.
The process of Partition is recognized differently between the Hindu Laws and tax laws. Under Hindu Law, the division of properties by metes and bounds is not mandatory for recognition of partition, while in the case of tax laws, the division of properties by metes and bounds is essential. Under Section 171(9) of the Income-tax Act, 1961, partial partitions cannot be recognised, which is contrary to the stance of Hindu Laws.
Reunion is possible only amongst those who are partitioned. A.M.V Chettiar 215 ITR 856.
Equal Rights: The main disadvantage of Huf is that all the members have equal rights. The common property of the HUF can not be sold without the consent 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.
Assessed till Partition: Huf is Assessed till the Partition is Claimed by any member. Any income generated from the property that was partitioned is taxed in the hands of individual members. If the Member create a New HUF out of the partitioned HUF then the income generated from the property will be taxable in the hands of the new HUF.
What is a HUF?
A HUF consists of individuals who are lineal descendants from a common ancestor, including their spouses and unmarried daughters. It is not formed by a contract but by the status of a family. This structure applies to Hindus, Buddhists, Jains, and Sikhs. HUF can be perpetual.In the case of Surjit Lal Chhabra vs CIT, by the Supreme Court clarified, that a ‘Joint Family’ and a ‘Hindu Undivided Family’ are synonymous. The court explained that a joint Hindu family are of people who are from a lineal descendant of the common ancestor and includes their wives and unmarried daughters also, and the daughters after marriage, will stop being a part of their father’s family. A married Hindu couple can establish themselves as a HUF if they receive any ancestral property.
Formation of a HUF
Automatic Formation: A HUF is automatically formed when a person marries and starts a family. It doesn't require owning property or estate.Members: The family members are called coparceners, and they include individuals within four generations from the common ancestor.
Management and Control
Karta: The oldest male member is typically the head of the HUF, known as the Karta. However, women can also be Karta following a landmark court decision made by the Delhi High Court in January 2016, but the same is not incorporated in the Income Tax Act as of now. This changed in the year of 2016 with a landmark judgement.In the case of Mrs Sujata Sharma Vs. Shri Manu Gupta & Ors (2011)., it is said by the Hon’ble Court that; The impediment which prevented a female member of an HUF from becoming its Karta was that she did not possess the necessary qualification of co-partnership. Section 6 of the Hindu Succession Act is a socially beneficial legislation; it gives equal rights of inheritance to Hindu males and females. Its objective is to recognize the rights of female Hindus as coparceners and to enhance their right to equality apropos succession.
The Supreme Court held that the daughters of a HUF can also become Karta. This led to the expansion of the rights of females under Section 6 of the Hindu Succession Act, of 1956.
The head of HUF is called Karta and Members of HUF are called by Coparceners. They are related to each other and related to the head of the family.
On the death of Karta the oldest male member will become the Karta of the family.
Coparceners: These are family members who have a right to the family property by birth. They can demand a partition of the HUF assets.
The daughter of a coparcener by birth will become a coparcener in her own right in the same manner as the son and she can also claim the partition of assets of the family.
Unmarried Daughters are also members of HUF. With effect from 6th September 2005, daughters also have coparcenary status. Only Coparceners have a right to partition. HUF May have many members but members within four generations, including Karta.
Residential Status of HUF
HUF residential status is determined based on from where the HUF is managed not from the residential status of Karta.Resident: According to Section 6(2) of the Income Tax Act, 1961, HUF will be resident in India if the control and management of its affairs are wholly are partially in India.
The Karta or the manager of the family has to be resident in India for at least a minimum of 2 years out of 10 years, which is, at least 730 days or more in the preceding previous year. Also, The place where he manages and controls his HUF should be in India.
If Karta is NRI but HUF is managed from India then HUF will be resident in India.
Non-Resident: HUF will be non-resident If the control and management are wholly outside India.
Resident and ordinarily resident/ Resident but not ordinarily resident :
If Karta of Resident HUF fulfils the following conditions then resident HUF will be resident and ordinarily resident other it will be resident but not ordinarily resident.
Karta of resident HUF should be resident in at least 2 previous years out of 10 years preceding the relevant previous year.
The stay of Karta during the 7 previous years immediately preceding the relevant previous year should be 730 days or more.
Taxation and Benefits
Separate Entity: A HUF is treated as a separate entity for tax purposes. It has its own PAN and files separate tax returns.Tax Deductions: HUF can claim deductions under various sections like 80C, and it can also invest in tax-saving instruments.
- Gifts to the HUF up to 50,000 are tax-free; larger gifts get benefits.
- HUF can take life insurance policies for its members.
- HUF can take Health insurance policies u/s 80D for its members.
- HUF can pay salary to its members if they involve in the functions of the HUF and the same will be deducted from the income of HUF.
- HUF will be taxable at the same rates as an individual.
- The HUF is entitled to claim a deduction on interest on self-occupied house property, as per section 24(b) of the Income Tax Act,1961, of Rs. 2,00,000.
- HUF can also avail Section 54 and Section 54F,54B 54EC of the Income-tax Act,1961, to claim capital gain exemptions
Income Distribution
The income generated by the HUF is taxed in the hands of the HUF, not the individual members.Any Return on the investment made by the HUF will be taxable in the hands of the HUF.
However, the following income will not be taxed as income of HUF
- If any member transfers self-acquired property to the HUF without any proper sale consideration then income generated from that property will be taxed in the hands of the member transferring property not in the hands of HUF.
- The personal income of the member can not be treated as income of HUF.
- Income generated from the individual property of the daughter is not taxable in the hands of HUF even if such property is vested into HUF by the daughter.
- Any gift received by the HUF from its members is non-taxable as per Section 56 of the Income Tax Act, 1961, the income accruing to the HUF from such a gift will be clubbed with the income of the member making the gift as per provisions of Section 64 of the Income Tax Act, 1961.
- A gift from any other person is tax-free only up to Rs 50,000/- in a year
Steps to Create an HUF
Only one person can not form HUF, it can be formed by a family only.Create a HUF Deed: A legal document stating the names of the Karta and coparceners. It can be only created by Hindus, Buddhists, Jains and Sikh Family.
- HUF Requires a Bank Account and PAN
- HUF can also be created upon marriage. It includes the husband, wife and their children.
- HUF has assets which come as a gift, a will, ancestral property, or property acquired from the sale of joint family property or property contributed to the common pool by members of HUF.
- Receipt of funds from the parents or in-laws to start the operation of HUF has to be included in the legal deed. The deed is a declaration to be signed by the Karta with relevant details on a stamp paper which needs to be notarized.
Partition of HUF
Partition of HUF can be demanded by the members.Partition under Hindu Law is classified into two methods: Total or Partial.
In total partition, all the members end up being part of the HUF and all the properties get terminated to be properties owned by the respective HUF.
The Partition is partial vis-a-vis members, some of the members are excluded on partition and the remaining members resume to be the members of the family. Sometimes, it can also be vis-a-vis properties, where some of the properties are divided within the members, and the other properties remain as the HUF properties.
The process of Partition is recognized differently between the Hindu Laws and tax laws. Under Hindu Law, the division of properties by metes and bounds is not mandatory for recognition of partition, while in the case of tax laws, the division of properties by metes and bounds is essential. Under Section 171(9) of the Income-tax Act, 1961, partial partitions cannot be recognised, which is contrary to the stance of Hindu Laws.
Reunion is possible only amongst those who are partitioned. A.M.V Chettiar 215 ITR 856.
The Disadvantage of an HUF
HUF is a perfect entity for tax saving as a family, but it also has some disadvantages which are as follows:Equal Rights: The main disadvantage of Huf is that all the members have equal rights. The common property of the HUF can not be sold without the consent 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.
Assessed till Partition: Huf is Assessed till the Partition is Claimed by any member. Any income generated from the property that was partitioned is taxed in the hands of individual members. If the Member create a New HUF out of the partitioned HUF then the income generated from the property will be taxable in the hands of the new HUF.
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