PREFACE

Hindus constitute a majority of the Indian population. Hinduism, being an ancient religion and a way of life, has customs, traditions and rituals centuries old followed by its members to this day. The joint family system, in which members of one family lived together under a common roof, including married brothers, their children and grandchildren, is in practice even today amongst most Hindu families. Under this system, the members of a family share houses, properties, business, income, wealth, food and their value systems and principles. Therefore, in India, a joint Hindu family is given a separate legal entity status called µHindu Undivided Family¶ (HUF) and this status is shared and enjoyed by all members of the family. HUF is an excellent tax saving device as being a separate legal entity under the tax law it is assessed to tax separately as a distinct legal person. Therefore, a person can file two income tax returns, one in his personal individual capacity and the other in the name of his HUF. This gives him the benefits of dividing his taxable income between two entities and also double deductions and expenses in both capacities. This brings down his total taxable income an d tax liability substantially. I shall be demystifying the HUF world and bring about the salient features of an HUF vis-à-vis the taxation system in India and also illustrate ways and means by HUF status can be effectively used as a Tax Planning tool.

LT CDR ANKIT PANDEY NATIONAL INSTITUTE OF FINANCIAL MANAGEMENT

CONTENTS The Hindu Undivided Family: Origins How does it come into being? Creation of HUF Frequently asked questions Concepts of Karta HUF and Tax Planning Illustration of tax planning by example LT CDR ANKIT PANDEY NATIONAL INSTITUTE OF FINANCIAL MANAGEMENT .

09. The modern Indian government embarrassed by these antediluvian. No member can enforce the partition of the HUF so long as the father lives. Not all members of the HUF are its coparceners. the foremost authority on Hindu law. the father is the sole owner and the exclusive possessor of the joint family property. all you have to do is Get Married. On 9th September 2005. there came along another variation of the Hindu law called the Dayabhaga written by one Jimutavahana. The Mitakshara law governs Hindus in the rest of the country. So gender bias has largely been taken out of the HUF laws. But the Mitakshara law stipulates that the property vests in the HUF itself and not in any individual member of the family and therefore can be partitioned within the lifetime of the father. The Hindu Undivided Family has its roots in the ancient Hindu law like the Manu Smriti. 1956 was amended to provide that a daughter too could be a coparcener i. The Dayabhaga law is prevalent in West Bengal and Assam. A coparcener is one who has a right to demand that the family property be divided and they be handed over their share in the property (or whatever assets the HUF has) in case he or she decides to part ways with the HUF. has described the Mitakshara as "the quintessence of the Smriti law. anachronistic laws has sought to bring them inline from time to time with the egalitarian values of 21st century. and Mitakshara codified by Vijneshwara somewhere around the year 1100AD. who lived around 200 BC. HOW DOES IT COME INTO BEING? 2. The HUF gets created as LT CDR ANKIT PANDEY NATIONAL INSTITUTE OF FINANCIAL MANAGEMENT .2005) . joint heir. its precepts and injunctions". particularly in relation to succession and inheritance. The most frequently asked question about HUF is: How does it come into being? To form an HUF. the Hindu Succession Act. 2nd degree: Sons and daughters (09. She continues to be the coparcener in her father's HUF even after she gets married and forms another HUF with her husband. Manusmriti completely forbade women to have a share in the family property. like her brother to the joint family's assets and she too could enforce the partition of the family property to claim her individual share. Under the Dayabhaga system. Later in the 12th century. Mulla. 4th degree: Great grandsons.e. 3rd degree: Grandsons. compiled by a male chauvinist Hindu "Scholar" called Manu. The Dayabhaga challenged and deviated from the Mitakshara law in some ways. the Yajnavalikya Smriti compiled by Yajnavalikya and Narada in 100 and 200AD (it merely embellished what had already been laid down by Manu). The coparceners extends to four degrees down the family hierarchy in the following manner: 1st degree: Holder of ancestral property for the first time.THE HINDU UNDIVIDED FAMILY: ORIGINS 1.

HOW ONE CAN CREATE HUF(HINDU UNDIVIDED FAMILY)? 4. The husband and wife together make up a family. A way-out is to receive gifts from members of bigger HUFs.section or Normal²not withstanding. Every Hindu becomes a member of an HUF the moment she ejects out of her mother's womb. Muslims and Christians cannot form HUF. mode of delivery --C. Strangers can make gifts but only up to Rs 50000 (Section 56). Someone may ask. The answer is very interesting that the above question is wrong the correct question is How we can create capital for HUF?' We cannot create HUF but can arrange capital for it "Till the time the HUF has an empty kitty. it is like a balloon that no one has yet blown air into. There have to be a minimum of two people to constitute a family. he cannot. How to blow funds into the HUF and turn it into a balloon that floats? 5. 6.soon as you complete the seven circles round the holy fire and become Man and Wife. The tax-free income can then be reinvested to earn even taxable income--income on income is out of the clubbing provisions. They don't have to wait till they have a baby to constitute their HUF. but to create his own HUF he has to wait till he ties the nuptials. as this law doesn¶t apply to them. "Creation of an HUF" is an oxymoron²-a contradiction in terms. dormant. A balloon can rightfully be called a "balloon´ only when it swells up with air inside it. Only orphan-and-unmarried Hindus don¶t belong to an HUF. "Can an unmarried man create an HUF?" No. who though your relatives. A member of the HUF throwing his money into the common pool. But the clubbing provisions can be bypassed if the HUF invests the money in instruments yielding tax-free income. An HUF too is inert and dormant without funds. A father may make a gift of money to his son's newly LT CDR ANKIT PANDEY NATIONAL INSTITUTE OF FINANCIAL MANAGEMENT . Indian Buddhists and Sikhs also. thanks to Section 64(2) which would tax the income earned by the HUF on that money in the individual member's hands only. Come to think of it. if you mean an HUF of which he seeks to be the Karta himself. Without the air the balloon is inert. aren't members of your smaller HUF." CA Sanjeev Bedi (Ludhiana) Hindu Undivided Family signifies that the undivided family should be of those to whom Hindu Law Applies . is out of the question. He can very well be the member of the HUF of his father or grandfather. or to use that overused cliché' the family hotchpots. 3.Hindu Law applies to Jains.

8. It also enjoys the exemption under Sections 54 and 54F in respect of capital gains. IMPORTANT QUESTIONS ANSWERED How does an HUF reduce taxes? 9. and the rebate under Section 88. What are the rights of the members? 10. the distinction between what constitutes the individual's income and what is HUF's income may get blurred. The karta generally manages the family property. Accordingly. Transfer money by gifts etc to HUF capital keeping in view the clubbing provisions and tax on gifts under Income tax act.created HUF. An HUF is a good tax-cutter because. We should have opened a bank account first (not must) but it is advisable so that we can have transaction by cheques. This is done by way of distributing the HUF property among the coparceners. 80CCB. it is treated as a separate entity and assessed to tax as a separate person. This will keep both Section 64(2) and Section 56(2) at bay. Formation of capital of HUF. under the income tax laws. The basic difference between a coparcener and a member is that a coparcener can demand partition of an HUF. 7. Now with everybody comfortable with the question because creating a capital by transfer. And so. care has to be taken to keep the HUF's affairs completely distinct from the individual members' affairs. including the benefit of t he basic limit chargeable to tax and wealth tax that¶s available to an individual. Where the members of the HUF carry on their individual businesses. as they normally do. an HUF is eligible for all the deductions and exemptions. which is regarde d as the joint property of all the coparceners. gift and all like stuff so to have capital in HUF account we should take following steps. who aren't members of the HUF but are relatives in terms of Section 56(2). an HUF¶s income is tax-free up to Rs 50. 80GG. 80L. clearly specifying in the Gift Deed that the gift is to his son's smaller HUF and not to the son himself. the members will only be entitled to receive maintenance from the HUF. 80G. Apply for permanent account number (pan). LT CDR ANKIT PANDEY NATIONAL INSTITUTE OF FINANCIAL MANAGEMENT . ca n also be found out. Remember there is no Tax on gifts in kind though they may attract clubbing provisions in some cases. the deductions u nder Sections 80CCA. like an individual. Some other people.000. While each coparcener is then entitled to a share of the property. 80D. After the HUF has a nucleus of its own and gets going.

securities. And so. there can be substantial savings in tax. Importantly. it can earn income from house property. If. if it arises on account of the personal investments of any member. the individual and the HUF are tot ally different units for tax purposes±they are two different assesses. If an HUF contributes funds to the capital of a partnership firm in which it is represented by the karta or any other member who represents the HUF. apart from movable and immovable property. the assets received on the death of a benefactor after 1956 (when the Hindu Succession Act came into force) will not be regarded as HUF property. an HUF cannot earn income from salaries. then the profits and interest received from the firm will be treated as HUF income. however. the partnership firm also pays the karta (or the member who represents the HUF) a salary for efforts put in by him. An HUF can also carry on a business that is managed on its behalf by the karta. it will generally be regarded as the individual income of the member. income from business and capital gains.What income is regarded as HUF income? 11. It¶s important to remember that the same person can be taxed separately as an individual. 12. the income should have been earned using HUF property or funds or property only. even though such assets have been inherited. since emoluments are given for personal skills. However. 13. and not clubbed with that of the individual. The two capacities are totally different. What are the assets of an HUF? 14. but as individual property. A point to be noted: in the absence of a will. the remuneration will be regarded as the ind ividual income of the karta/member. What are the tax benefits? 15. This is because the income arises on the investment of HUF funds. It can also hold shares. Any gift that is given specifically to an HUF can be treated as HUF property. and income from other sources. LT CDR ANKIT PANDEY NATIONAL INSTITUTE OF FINANCIAL MANAGEMENT . All the income that arises on the utilisation of the HUF¶s assets and on the investment of its funds is regarded as the HUF¶s income that is assessed separately and chargeable to tax. as well as for and on behalf of the HUF. Since an HUF is a separately entity. Assets can also be bequeathed to an HUF by way of a will that specifically favours the HUF. Since the income earned by way of rent under the head µincome from house property¶ or under other heads like µcapital gains¶ is assessed separately in the HUF¶s hands. The assets received on the partition of a larger HUF of which the coparcener was a member is also perceived as HUF property is also treated as the property of the HUF. jewellery and any other valuable articles or articles. and so the income belongs to the family.

Section 80L. the patter families of the family. under Section 88. is usually the Father. Karta 20. etc. it will not be clubbed with the individual¶s income. Another option is to transfer individua l funds to the HUF and then invest the money in tax-free instruments. The HUF is also eligible for the following deductions: Section 80D. The income arising on the reinvestment of the tax-free income (which may be in taxable income-yielding assets) will also not be clubbed. Then. instead of separately to individual members of the family. for the insurance premium paid on the health of its members. one can always explore the possibility of conducting the business in the HUF¶s name to utilise the family¶s funds for better returns. Again. and it is thereafter invested in the HUF¶s name. 18. Since there is no gift tax and estate duty. where an individual cannot carry out certain types of businesses or transactions owing to employment restrictions or othe r such considerations. 19. although it is possible for a member of the HUF to transfer his or her individual assets to the HUF. which in Hindi means the Doer. and contributions to the Public Provident Fund accounts of its members. in respect of the income on bank and post office deposits. due to the tax provisions governing the clubbing of such income with the income of the transferor. the income arising on the investment will be regarded as the income of the HUF. He has immense powers over the affairs of the family. for any donations it makes. The capital of an HUF can also be enhanced by borrowing funds from people who are not members. The Karta. such a transfer isn¶t beneficial from the tax point of view. more than any other coparcener can wield. Section 80G. Finally. etc. neither the benefactor nor the recipient will attract tax on such a transfer. Since the income from such investments will be tax-free. Can a female be the Karta? LT CDR ANKIT PANDEY NATIONAL INSTITUTE OF FINANCIAL MANAGEMENT . One option is to ensure that gifts or inheritances meant for the benefit of all the members of a family are gifted specifically to the HUF. since only the income arising on transferred amounts is clubbed. If the borrowing are specifically in the HUF¶s name. This is because there is no transfer of the tax liability on the income from such assets. What are the tax-planning options? 17.16. it gets a rebate in respect of the premium paid on life insurance policies for its m embers.

21. in the unfortunate event of her father passing away. It is however. the Supreme Court said that "an HUF is undoubtedly a person within the meaning of the Indian Income Tax Act. 23. the Supreme Court disallowed the interest paid to coparceners on the loan the HUF had taken from them as a business expenditure u/s 37(1). Yes. In Ram Laxman Sugar Mills v. such a remuneration must be held to be an expenditure laid out wholly an d exclusively. Can there be an all-female HUF? 22. there can be. The fact tha t Income Tax law grants a PAN to it and treats it as an assessable entity does not bestow upon it the status of a person under the general laws. Partition of the HUF LT CDR ANKIT PANDEY NATIONAL INSTITUTE OF FINANCIAL MANAGEMENT . being not a legal person. CIT 63 ITR 238 (SC). Where a couple has only one issue²-a daughter²-and the husband passes away. In CIT v. for the purpose of the business and must be allowed as an expenditure under section 10(2)(xv)[corresponding to the present -day Section 37(1)] of the Act". not a juristic person for all purposes and cannot enter into an agreement of partnership either with another undivided family or individual". This ha s been held to be so in numerous cases. will become the Karta of the HUF if she has no brother. the Supreme Court held that "if remuneration is paid to a Karta of the family under a valid agreement which is bona fide in the interest of and expedient for the business of the family and the payment is genuine and not excessive. Can an HUF pay remuneration to its Karta? 25. An unmarried daughter. It has been held by the Allahabad High Court in CIT v. in Jugal Kishore Baldev Sahai v. the mother-daughter duo can continue the HUF (although a problem may arise after she gets married and becomes a member of her husband's HUF). Gopal Bansilal Inani (2000) 245 ITR 2 (SC). There have been cases where the courts have held that businesses started by individual members after borrowing funds from the HUF were assessable in the HUF's hands. Sarwan Kumar 13 ITR 361 (All) that there can be an HUF consisting of female members only. CIT 66 ITR 613(SC). The answer can't be no in the light of the amendment in the HS Act in 2005. 24. Yes. The Karta can enter into partnership with a firm on behalf of the HUF. So think twice before letting the HUF lend any money to its members and vice versa. can never be a partner in a firm. But the HUF itself. especially where the HUF is already engaged in the same business.

an Anglo French term. you may have eliminated the HUF by portioning the property (or what ever assets) of the HUF. Typically. he can cough up some cash to the other members to compensate them for loss of FD. Care mu st be taken that erstwhile coparceners don't simply end up becoming co -owners in the property. interest on it will continue to be a ssessed in the HUF's hands. "Metes and Bounds". only when the HUF is stripped naked of each and every layer of the clothing of property²-tangible or intangible. What metes and bounds partition does is deflate the balloon of the HUF. the Income Tax law frowns upon it. For example an FD held by the HUF being partitioned can't be converted into a joint FD of members after partition. delineating the share of each member. movable or immovable --it had. taxpayers tend to focus on ways of reducing only their own tax burden.26. The FD can continue only in one member's name. One may like to explore the following possibilities of sharing of income and wealth within the members of your family in order to lower the overall tax liability. This is a normal thing to do. but the taxation authorities have invested themselves with powers u/s 171 of the I T Act to continue to treat the defunct HUF as an assessee liable to pay tax unless the partition is effected in strict keeping with the manner laid down in that section. (a) Create an HUF (Hindu Undivided Family) so that the family property and family income is assessed separately from that of the individual members of the family. But a non-physical property will have to be divided up amongst the members in such a manner as to comply with Explanation (b) below Section 171(9). Although the Mitakshara and other Hindu laws do not forbid partial partition of the HUF. HUF AND TAX PLANNING 27. Under the Hindu law. including minor children. if it is. means the boundaries or limits of a tract of land. The Income Tax law will recognize its demise. By combining the leeway offered by non-taxpaying members of a family. it isn't difficult to divide it up. but far greater tax savings are possible when the family as a whole is considered as a tax paying unit. Total partition in the context of the IT Act means partition by metes and bounds. The law wants to dissuade assesses to smash up their bigger HUFs into smaller ones just to create more files to bring down their tax liabilities. LT CDR ANKIT PANDEY NATIONAL INSTITUTE OF FINANCIAL MANAGEMENT . Here is how: 28. and judiciously sharing the family income and wealth among all its members. Tax practitioners can help you in creating an HUF in a perfectly legal manner. (b) Open as many assessment files as possible for the members of your family. If the HUF property is physical. you will find additional ways of reducing your family's tax burden.

10 -year cash certificates. e. Instead. Moreover. But it offers several key insights into the principles and strategies of tax planning. If you have two children you can open two PPF accounts and deposit Rs 15. you may consider making a gift to your would-be spouse or your son's would-be-spouse. which they may invest in income earning assets. modify and improve it to suit to your specific income and tax needs. Such pre-marital gifts do not attract the clubbing provisions. 30. Since the income-clubbing provisions apply only so long as your children are minors. You will get tax deduction under 80C. e. interest on PPF is totally exempt from income tax.(c) Keep separate accounts for all the gifts received on birthdays and social functions so that they can form the sources of future income through suitable investments. The interest on interest does not attract the clubbing provision. Thus. Let us now consider a comprehensive example of tax planning for a family of husband and wife with two children. etc. 31. You can. Some smart assessees do not gift anything to their spouses.000 Colgate equity shares with the jewellery owned by his wife. they organise exchange of assets to avoid clubbing provisions. Since the accretions to income arising on the transfer of asset does not attract the clubbing provisions you can gift any amount which can be invested by your wife or daughter-in-law in 9 per cent fixed deposit. 29. when children become majors. etc. of course. a husband exchanges his 1. you would have created capital for them while enjoying the tax benefits in the interim. you may make gifts within reasonable limits to the members of your family out of the HUF properties and build their separate assets. loan any amount (create evidence to avoid hassles in future) to children and spouse. (e) If you are the karta of your HUF. you may gift them some assets where the income will be received by them only after they attain 'major' status. You can use the Public Provident Fund scheme for building up capital of your minor children. (d) To avoid problems of the clubbing provisions. Since a genuine loan of any amount to your spouse or children does not attract the clubbing provisions.g.g. It is only the interest on such amount gifted that is include d in the income of the individual. Ramesh's gross salary LT CDR ANKIT PANDEY NATIONAL INSTITUTE OF FINANCIAL MANAGEMENT . An Example Of Family-Wide Tax Planning 32.000 in each account every year. zero-coupon bonds.

000 towards municipal taxes. Ramesh's take-home pay Thus.Mr.000 towards municipal taxes.000 and the interest paid during 2008 -2009 is Rs 60.000 Less: PF Contrinution (10%) (-) 2.000 Ramesh's income from house property Ramesh purchased a flat in his own name by taking a loan of Rs 10 lakh (Rs 1 million) from his employer @ 6% p.000 (+) 6.Ramesh is an executive working for a well-known company.000 Less: Municipal taxes 20.000 Rs Less: 30% standard deduction (-) 30. Ramesh gets a monthly rent of Rs 10.000 Rs 30.000 HRA 18. his take-home-pay is as under: Rs Salary 20.000 10.000 Rs 6. assuming that he spends the entire amount.000 Interest on loan (-) 60. repayable over 20 year s.000. The annual installment is Rs 50. Thus the income from house property of Ramesh will be calculated as under: Rs Annual value (Rs 10.000 LT CDR ANKIT PANDEY NATIONAL INSTITUTE OF FINANCIAL MANAGEMENT . Mrs Gupta pays Rs 12. the entire house rent allowance received by Gupta is exempt from tax.000.000 Ramesh lives in a flat owned by his wife and pays a monthly rental of Rs 8.000 made up as under: Salary House Rent Allowance Conveyance Reimbursement Total Rs 20. His gross salary per month is Rs 30.a. Similar is the case with conveyance reimbursement.000 from this flat and pays Rs 20.000 Rs 6.000 Net annual value 100.000 x 12) 120. Under the present rules.000 24.

586 acquisition (Rs.500 earning 8% p.Ramesh's family expenses and investments Ramesh's family expenses are about Rs 18. Thus. the son sold these shares @ Rs 251 per share. Ramesh's wife has deposits in banks to the tune of Rs 162. In May 2007.Y. Ramesh deposits varying amounts in the PPF account every year to minimize the tax liability.a.200 Less: Indexed cost of 67. Rs Taxable long capital gains 233.000 LT CDR ANKIT PANDEY NATIONAL INSTITUTE OF FINANCIAL MANAGEMENT .000 250. This year he invested Rs 21.000 10.125 % is 292 payable Post tax proceeds 300. 83) 551/406 x 49.908. Rs Sale value (Rs 251 x 1. Mr. All the birthday gifts amounting to Rs 50.000 in Unit -linked insurance plan of the Unit Trust of India. Ramesh's Income (A. The total picture Let us now look at the total picture: 1.m.200. There is a Public Provident Fund account opened by Ramesh in his minor son's name.614 The long term capital gains are exempt.000 p.800 The acquisition cost of bonus shares is Nil. the number of shares increased to 1. on various household expenses. Ramesh's son had a capital of his own to the tune of Rs 300.000 x 12) Income from house property Total Income Less: Deductions Rs 240.908 Thus.200) 301. However Transaction tax @0.000 received by his son were pooled up by Ramesh and invested in about 600 shares of Evergreen Infotech Ltd @ Rs 83 in May 2000. The company gave a bonus issue of 1:1 in 2009 . 2009-10) Rs Salary (Rs 20. He is now 19 years old.000 in PPF account and contributed Rs 5. 600 x Rs. by the time he became of major.

Section 80C PF (Rs. let us look at the family cash flows: Cash Flows Mr Ramesh Rs Rs Rs 96.300 Tax Nil Nil Nil Nil As Ramesh needs about Rs 18. he invests a sum of Rs 300.5% SLR Power Bonds and earns a tax-free interest of Rs 25. for household expenses. 2.000 50.000 5.000 84.a.000 in 8.000 x 12) PPF ULIP Repayment of Loan (principal) Taxable Income Tax 24.000 71.500 p. Master Ramesh's Income Out of his capital.800 Nil LT CDR ANKIT PANDEY NATIONAL INSTITUTE OF FINANCIAL MANAGEMENT .000 12.000 25.m. Ramesh's Income Rs i) Income from house property Annual Value Less: Municipal Tax Less: 30% Standard deduction Interest on Bank deposits Total Income Tax 3.800 13. Summary Mr Gupta Mrs Gupta Master Gupta Total Rs Rs Rs Rs Gross Income 150.000 71.200 58. Mrs.000 p.500 247.000 21.000 150.000 Nil 2.000 100.800 25.

000 110. LT CDR ANKIT PANDEY NATIONAL INSTITUTE OF FINANCIAL MANAGEMENT .000 24. This example of the Ramesh family shows how any family can prosper by careful planning of investments and tax.000 5.Inflow Salary + House property income + HRA) Outflow PF Housing Loan Municipal taxes ULIP PPF Net inflow Mrs Ramesh Master Ramesh Total inflow for the fmaily 408.500 254.000 180.000 228.500.000 20.500 Thus. the cash flow position will be quite comfortable leaving a surplus of nearly Rs 38.000 1.000 25.

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