Though HUF seems like the perfect way to save tax as a family, it comes with its own drawbacks. Below-mentioned are the few demerits of a joint Hindu family business:
There are certain ways through which HUF Capital can be created and some of the most popular methods to infuse capital in a HUF is by receiving gifts in such a manner that they don’t attract any tax. Some of the most effective and popular methods of creating HUF Capital by receiving gifts without attracting any tax are:-
On maturity of this instrument, the HUF can invest the money anywhere and in any way in which it likes and the income won’t be clubbed. In other words, Income generated from Income won’t get clubbed.
The income earned by the HUF would be taxable as per the Income Tax Slabs and the HUF is also required to file income tax returns just like Individuals. All income tax deductions are also available to HUF just like they are available to an Individual. Moreover, if the turnover of the business of the HUF is more than the limit specified under Section 44AB i.e. 50 Lakhs/ 1 Crore, it would also be required to get an audit conducted by a Chartered Accountant.
A Hindu Undivided Family can be created by following ways-
Blending of individual property with the family HotchpotRead More...
Receipts of GiftsRead More...
Doing Joint labor for the benefit of HUFRead More...
A Partial partition that has taken place after 31-12-1 978 is not recognized the Income Tax Act, 1961 (Sub-section 9 of section 179. Therefore even after the Partial partition, the income of the HUF shall be liable to be assessed under the Income-Tax Act as if no partition had taken place.After the Partition, the assessment of HUF shall be made as per the provisions of Section 171 of the Income Tax Act and order to be passed by the Assessing Officer.The sum received by a member as and towards his share as coparcener of HUF, on its partition cannot be brought to tax as income.Setting apart of certain assets of HUF in favor of certain coparceners on the condition that no further claim in properties will be made by them, is nothing but a partial partition and not a family arrangement and not recognized in view of section 171(9) of the Act.
Property purchased with the aid of joint family funds, howsoever small that may be, still the property would be HUF income and cannot be income of the individual with major portion of purchase price.
General provisions applicable to HUF:
HUF means Hindu Undivided Family. You can save taxes by creating a family unit and pooling in assets to form a HUF. HUF is taxed separately from its members. A Hindu family can come together and form a HUF. Buddhists, Jains, and Sikhs can also form a HUF. HUF has its own PAN and files tax returns independent of its members.
The head of a HUF is called the Karta; he is the senior-most male member of the family.
Yes! Until January 2016, a woman could not be the HUF Karta. But in a landmark case, the Delhi High Court ruled in favor of a female being the Karta of a HUF. However, the same has not been incorporated in the Income Tax Act as yet.
All the members of the Karta’s family can be members of the HUF. The male members are called coparceners, while the females are referred to as just members. The difference between the two is that any of the coparceners can demand partition of the HUF. The female members do not have this right in most parts of the country, except for some states like Maharashtra and Tamil Nadu that have allowed unmarried daughters to function as coparceners. The Hindu Succession (Amendment) Act, 2005 which came into force from September 9th September 2005 removed this gender discrimination by giving equal rights to daughters as sons. The daughters become the coparceners of their father’s families on birth in the same manner as sons and have the same rights as sons in the family properties.
No. Both the daughter and the father has to be alive on the date of the amendment for the daughter to get the benefit, irrespective of whether she has been married or not on that date. If the father has passed away before the amendment date, then she wouldn’t have been a daughter on the date of the amendment. Hence she cannot claim a share in father’s property.
The following incomes are not taxed as income of HUF-
A HUF can be formed with just two members one of whom is a coparcener. But for an entity to be taxed as a HUF, it should have at least two coparceners. For instance, if HUF consists of only the husband and wife, then there is only one coparcener. So it will not be taxed in the hands of HUF except in the case where the funds are received on the partition of larger HUF. It will be taxed in the hands of a sole coparcener.
It is not necessary that a HUF must always be a resident of India. In case the control and management of the HUF are situated outside India, the HUF would be a non-resident. Where the affairs of the HUF are managed from outside India, the HUF would be a non-resident.
The residential status of a HUF is determined not on the basis of where the Karta resides but on the basis of where the HUF is managed from. In this case, though the Karta resides outside India, the HUF is managed by members from India and hence the HUF will be a resident of India.
The HUF being a separate taxable assessee, can claim a deduction under section 80C. However, the member and the HUF cannot claim a deduction in respect of the same investment made or expense incurred.
Upon the demise of Karta, the eldest male member of the family becomes the Karta of the family. Even when the deceased Karta’s wife is alive, the eldest son or any other eldest male member of the family will take over that position.
A HUF is considered to be a resident of India if the control and management of its affairs happen wholly or partly in India. In some cases, the Karta of the family may be non-resident. The resident status of the family will not change to be non-resident only because the Karta is a non-resident unless the decisions concerning the family are made outside India.
No HUF arises only from status.
It is the property, which a man inherits from any of his three immediate male ancestors, i.e., father, grandfather, and great-grandfather.
No. A single person cannot constitute HUF. There have to be a minimum of two members to constitute a HUF. The existence of estate or property is not an essential requirement to form a Hindu Undivided Family. 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. An HUF cannot be created under a contract; it is created automatically in a Hindu Family.
A HUF is recognized under Income Tax Act as a separate assessable entity if two conditions are satisfied:
Finally, it is important to note that once a joint family income is assessed as that of HUF, it continues to be assessed as such in subsequent assessment years till partition is claimed by coparceners.
Yes. As so long as the property which was originally of the joint Hindu family remains in the hands of the widows of the member of the family and is not divided, HUF can continue with female members.
Gift by Karta of HUF, a movable property or an immovable property within reasonable limits in favor of his daughter is permissible on the occasion of her marriage.
HUF consist of Co-Parceners (who are Family Members) and the distant relatives i.e. called as Members of HUF.
Co-Parceners: Co-Parceners are the Family Members and it is consist of 4 levels of Lineal descendants including the first male ancestor. It is only a Co-Parcener who can demand the Partition of HUF. It will include the following:
Members of HUF: Any other distant Relatives who are not the Family Member (e.g. Brother-in-law, Sister-in-law etc.) would be deemed as the Member of HUF. Although they are Members of HUF, they are not the Co-Parceners. A member cannot demand the Partition of HUF.
Important Note: Wife is not considered as the direct part of HUF i.e. Co-Parcener. She will be a Member in Husband’s family HUF. Although, She will be a Co-Parcener in her Father’s Property. All co-parceners are members, but all members are not co-parcener.
A HUF can be formed with just two members one of whom is a co-parcener. But for an entity to be taxed as a HUF, it should have at least two co-parceners. For example; when any HUF consist of only Husband and Wife, then there is only one co-parcener (because the wife is a member but not a co-parcener) and therefore, in such case income can’t be taxed in hands of HUF. It will be taxed in the hands of Individual Co-Parceners.
Yes. As per Supreme Court decision in Jugal Kishor Baldeo Sahai Vs. CIT, such remuneration would be deductible if it is paid:
Unmarried daughters would always be a Co-Parcener and have the equal right over the property just like a Son. Although, the Status of Married Daughters would be as follows:
Since HUF is one person as per Income Tax Act, a Proprietor of a business can be an Individual or a HUF. A Proprietorship concern is not governed by any specific law as such, and therefore there is no bar on HUF becoming a Proprietor of any concern.
Blending means transfer of one’s individual property in the common hotchpot and make it a part of the common property of the HUF. There must be an intention to throw the separate property into the common stock and it is necessary to waive all separate rights in respect of the property, which must be clearly established through a declaration. Only the coparcener is entitled to throw in HUF’s common property.
This is for achieving distribution of immovable property among members because giving it in any other manner will require registration for effective transfer.Each division is entitled to claim exemption under Sec 5 (vi) of the Wealth Tax Act.
HUF is a creation of law and cannot be created by the act of parties, therefore, HUF cannot be created for the first time by a gift from the stranger. If HUF already exists, gift can be made by a stranger to such HUF.The gifted property will be HUF property if the gift is made to HUF. Intention of donor & the character of the gifted property will depend on the construction of the gift deed. Precautions to be taken by family while accepting gifts
Property acquired in the course of some business carried on by the persons constituting a joint Hindu family, takes the characteristic of joint family property. As per Hindu law, in case of properties not acquired with the aid of joint family property, it is presumed that property acquired by coparceners by working together is joint family property unless the persons concerned desire to hold it as co-owners. This is valid if the coparceners are carrying on work together and belong to the same line of ancestors. The income from such property is out of the purview of section 64(2) of the Income Tax Act, 1961 and section 4(1 A) of the Wealth Tax Act, 1957. In the cases of properties acquired with the aid of joint family property is also the joint family property.
A HUF can also be created by will of a person provided the will is valid and there is a specific request in favor of the HUF. Moreover, HUF need not be in existence at the time of execution of will. Even a stranger can bring a HUF into existence by making a will in the favor of HUF of a person. HUF is created if there exist a valid will.
Partition of an existing HUF can also result in creation of many smaller HUFs. As per Hindu Law, the property does not change its character on partition. Property received by a coparcener having a family, continues to have characteristic of HUF. An unmarried coparcener receiving any property will own the property in the status of HUF until he acquires the status of HUF. In case of married coparceners who have no child, the property will continue with the status of HUF. However, the partition has to be total partition because the law does not recognize partial partition as per section 171(9) of the Income Tax Act, 1961.
Even after partition of HUF, members may re-unite to form a new HUF. However, there are certain conditions to make such reunion valid in the eyes of law. Reunion can take place only when there was in existence a HUF and there was total partition of such HUF. It can take place only between persons who were parties to the original partition and to support such reunion, there must be an agreement between the parties. To constitute a reunion there must be an intention of the parties to reunite in estate & interest and such intention is evident. As per Mitkarsha, Dayabhaga and SmritiChandrika, a member of a joint family once separated can reunite only with his
The minor cannot be a part of reunion neither by self nor by someone on behalf of such minor.