HINDU UNDIVIDED FAMILY

Hindu Undivided Family (HUF) or a Joint Hindu Family Consists of all males lineally descended from common
ancestor their wives and daughter. Any married Hindu, Sikh, Jain or Buddhist man can form HUF. HUF is
automatically constituted on marriage. Few simple formalities to complete for HUF to function as legal entity
Formed from blending of individual property with HUF character, Gifts, Joint Labour, Will, Partition or Reunion.
There are two schools of Hindu Law i.e. Dayabhaga School of Hindu Law and Mitakshara School of Hindu Law.

CO-PARCENERS:-
1. Some of the members of HUF are designated as coparceners.
2. All coparceners are members of HUF, all members are NOT coparceners.
3. Husband & Wife form HUF; wife can only be member, NOT coparcener.
4. Coparcener is different from the other members of HUF, coparceners are those members who acquires by
birth an interest in the joint property of the family.
5. Coparcenary is restricted to four levels of living order.
6. Daughters also coparcener w.e.f. 9.9.2005 in the Hindu Succession (Amendment) Act, 2005.
7. After Hindu Succession Act amendments equal rights to daughters even after marriage. Married
women have rights in two HUFs-their father's as coparcener and their husband's as member. There's no
need to fill an application form or submit KYC documents for joining an HUF.
8. Members if the family who are not coparceners- No right to claim partition.
9. 1st Step Form a corpus for HUF can be any CAPITAL ASSET (like property, gold, jewellery, securities,
deposits) or CASH.
10. Daughter of a coparcener shall by birth become coparcener in her own right in the same manner as son.
11. Daughter has the same rights in the coparcener property as she would have had if she had been a son.
12. Daughter is allotted the same share as to the son.

Who can be a KARTA of HUF?

The FATHER of the family in absence, senior male member of the family. Unmarried daughter, in the unfortunate
event of her father passing away, will become Karta IF All male members are minors & natural guardian is mother
then she is the Karta. Where a couple has only one daughter and the husband pass away, 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).
The Karta Have Various Duties that are Managing the affairs of HUF, Maintaining the books of accounts, filing
tax returns for HUF, To enter in to contracts, form partnership firm, or representation on behalf of HUF.

The various ways of Tax Saving through HUF

General Benefits:-There are Separate exemption limit under Income-tax Act of Rs. 2,00,000, Separate
deduction u/s 80G, Separate deduction u/s 80C(Insurance Premium can be paid on life on any member up
to Rs. 1 lacks), Separate deduction u/s 80D(Medi-Claim) (Rs.15000), Section 80DD deduction for
maintenance including medical treatment of a dependant who is a HUF member, Salary to Karta /Member,
Separate Income-tax Deduction on Interest on loan for self occupied House Property in the name of
HUF(Sec 24(b)) and There are Separate exemption of Wealth-tax for HUF’s up to Rs. 30 lakhs Wealth and
One House- Wealth Tax Free and Productive assets of HUF fully exempt from Wealth-tax.

HUF can also take benefits of exemption of capital gain Cost Inflation Index benefit available to
Calculate Cost of the Asset, Tax benefit of 20% Tax on Long-term Capital Gains.(Except for non listed
shares-Without STT), Saving Tax on Long-term Capital Gain possible by investing in Capital Gains Bonds
of NHAI / REC, Long-term Capital Gains Saving by investing in Residential Property, No capital gains to
HUF on Distribution of assets on partition.

Stock Market, Mutual Funds & HUF:-HUF can have a separate Demat Account and can Make money by
investing in Primary Market and Secondary Market , Enjoy Tax Free Income for Long-term Capital Gains
by holding shares for more than one year(STT Paid), HUF has 2 benefits in investing in IPOs’ i.e. the 2
lakhs limit for the investment to be categorized as retail is not breached and there is a greater probability of
 more shares being allotted, Enjoy lower tax rate of 15% on Short-term Capital Gains(STT Paid), HUF can
also invest in mutual fund.

HUF can be a Proprietor of one or more than one Business concerns, Separate name can be kept of HUF
business entity. There are No requirement of tax Audit of HUF business if Turnover within Rs.1
crores.(AY-2012-13). The Business Income can be Computation @ 8% without books of account in case
turnover is up to Rs. 1Crores – The Presumptive Basis (AY 2012-13)

There are 30% Standard Deduction on Annual value of house property (Rental Income) to HUF u/s 24(a),
Self occupied one Residential House & the tax gain specially by way of Interest on Loan & Repayment of
Loan u/s 24(b) and Exemption from Wealth-tax on 1 Residential house in the name of HUF.

As per section 10(2) of the Income-tax Act, 1961 any sum received by an individual from Hindu Undivided
Family of which he is member is exempt from tax but Amount received not as a member of Joint Family
but in pursuance of some statutory provision, etc. would not be exempted in this clause and Member of joint
family living apart from the other members does not affect his/her position in law to claim the right as per
section 10(2).

Taxation of money received by HUF without consideration

1. Provisions of section 56(2)(vi) applicable even to HUF if any sum of money is received by the HUF
exceeding Rs. 50,000 p.a.
2. Items received in kind subjected to the provisions of sec. 56(2)(vi).

Gift of HUF Property

1. Elementary proposition that Karta of HUF cannot gift or alienate property except to the extent recognized
under the Hindu Law, namely necessity etc – CGT v. P.Hanumanthappa 68 ITR 363, K.P. Gupta v. CIT
233 ITR 456
2. Reasonable limits depends upon facts - CGT v. B.V. Narasimharaju 101 ITR 74
3. Karta can make reasonable gifts to daughters – Sushil Kumar & Sons v. ITO 234 ITR 98
4. Gift on Marriage Occasion is valid – S. Lakshmamma v. Kotayya AIR 1936 Mad. 825.
5. Gift of immovable property should be for pious purpose – CIT v. Ram Gopal Rajgharia 123 ITR 693
6. Gift to Strangers void – Guramma v. Mallappa AIR 1964 SC 510.

Gift by a member of HUF

As per section 64(2) a gift by a member of a Hindu Undivided Family after 31-12-1969 would attract Clubbing of
Income in the hands of the member and as such the income from the converted property shall be deemed to arise to
the individual & not to the family.

Partition of the HUF Only coparceners can demand partition. These are of two types-Total Partition: Property
divided amongst all the family, undivided family ceases to exist , Partial Partition: Some family members go out of
fold and others remain joint or some of the property is divided and other remains joint not recognized for tax
purpose, after 31.12.1978
As per section 171(9) of the Income-tax Act, 1961 the Partial Partition after 31-12-1978 is not recognized. Even
after Partial Partition the income of the HUF shall be liable to be assessed under the Income-tax Act as if no Partial
Partition had taken place.

Procedure to effect partition

• Under the Hindu law HUF may be ended by portioning the property (or whatever assets) of the HUF,
but for IT purposes are to be recognized by the AO.
• Share in assets of HUF: All coparceners, mother(in case of death of father), wife gets a share separate
from husband in case of partition between her husband and sons, son in womb of mother at time of
partition
• At the time of making assessment u/s 143, 144, it’s claimed by any member that the partition has taken
place AO shall make inquiry after giving notice.
 • After inquiry AO shall record finding as to whether there has been TOTAL PARTITION DATE of
such partition.
• Order u/s 171 passed by AO
• Where partition took place in the previous year is recorded by AO: Income of HUF before partition
shall be assessed as no partition has taken place. Each member shall be liable separately and jointly
for the income tax thereon
• For this section several liability of any member or group of member shall be computed according to
portion of joint family property allotted to him or it at partition.
• The provisions are applicable in levy and collection of any penalty, interest fine or any sum for period
up to partition date
• Total partition in the context of the I. T Act means partition by "Metes and Bounds”.
• The Income Tax law will recognize its demise (for want of a better word, since a divided Hindu family
can be reunited again),only when the HUF each and every layer of the clothing of property-tangible or
intangible, movable or immovable -it had has been removed

There are various advantages of HUF

• Helps avoid service tax: If business turnover is split by setting up HUF, the service provider can avoid the
hassle of charging service tax and become small scale service provider.
• Salary to Karta: This salary is taxed as his income and will be fully deductible from the HUF income.
• Use HUF income for expenses: The income earned by the HUF can be used for the household expenses of
the family.
• Distribute income to coparceners: Karta can gift money to the coparceners from the income earned by the
HUF. This income is tax-free in the hands of the coparceners. This way, person with a high income will be
able to get tax-free income.
• Give loan for business: HUF can give loans to the Karta or coparceners for setting up business & can charge
interest on the loan. Interest paid on any business loan is fully deductible.
• No MAT or AMT: unlike other corporate entities, no minimum alternative tax on HUF owned businesses.
• Small-scale industry exemption: or the business community, various exemptions and incentives given to
small-scale units are crucial to ensuring healthy margins.

HUFs can be made better by the following ways

In May 2005, the government passed a rule PREVENTING HUFs from opening new accounts in the Public
Provident Fund. All existing accounts, which had completed 15 years since the initial deposit, were also to be closed
by 31 March 2011, HUF CANNOT invest in other government securities such as the National Savings
Certificates, as well. These restrictions should be done away with. Why should HUFs be treated differently from
any other taxpayer, If the Karta of the HUF is crucial for its smooth functioning, the HUF should be allowed to take
a Key man life insurance cover for him and should be made the nominee, Hindu Succession Act accords equal
rights to female coparceners of an HUF, its only applicable to the Mitakshara school, it should be applicable to
Dayabhaga school (West Bengal and Assam) as well, Kerala does not have a HUF system. For the sake of
uniformity, the same rules should apply across the country, HUFs are not eligible for some tax benefits enjoyed by
individual taxpayers. They should also be able to claim deduction for interest paid on education loans, benefits for
pension fund contributions.