Article explains What is HUF, How HUF is formed, Evaluation of HUF, How HUF Helped in Tax Planning, Basic criteria for an HUF, Important terms which are used in a joint Hindu Family Business and  Limitations of a Joint Hindu Family Business.

What is HUF ?

HUF stands for Hindu Undivided Family in which members of the family come together to form a HUF. Most Senior Person Member of the Family is known as krta who is responsible for all the affairs of HUF. A child automatically becomes the member of HUF at the time of Birth.

Hindu Undivided Family (‘HUF’) is treated as a ‘person’ under section 2(31)​ of the Income-tax Act, 1961 (herein after referred to as ‘the Act’). HUF is a separate entity for the purpose of assessment under the Act.

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.

Jain and Sikh families even though are not governed by the Hindu Law, but they are treated as HUF under the Act.

How HUF is formed?

HUF is formed by creating a deed between the Members of the Family. The deed shall contain details of Members of family, nature of business & other relevant details of HUF. On the Basis of notarised deed, an application for PAN is filed in form 49A & on the basis of deed & PAN card a bank is open on the name of HUF.

Evaluation of HUF:

Under the Act, a HUF is acknowledged as a distinct assessable entity. If the two criteria below are met, its revenue may be determined:

There needs to be a partnership. In this regard, it is important to note that once a joint family income is determined to be HUF income, it remains determined as such in successive assessment years until coparceners assert their right to partition.

A joint family property should be established, consisting of property transferred by family members as well as property inherited from ancestors.

Ancestral Property: The possessions that a man inherits from any of his three direct male ancestors—his father, grandfather, or great grandfather—are referred to as his ancestral property.

As a result, assets received from any other relative are not considered ancestral assets. The following families are subject to taxation on their inherited income as HUF:

a) A family with a widowed mother and sons (who may be minor or major);

b) A couple without children;

c) A family with two widows of deceased brothers;

d) A family with two or more brothers;

e) A family with an uncle and a nephew;

f) A family with a mother, son, and son’s wife;

g) A man and his late brother’s wife.

How HUF Helped in Tax Planning?

As HUF is treated as separate person having its separate bank account & PAN therefore HUF is very much helpful in Tax Planning & not in Tax Evasion.

HUF is eligible to claim deduction under chapter VIA such as 80C, 80TTA, 80D etc.

  • HUF is very beneficial for those persons who are having interest Income from Fixed deposit & due to which they fall in 30% tax bracket, they can form HUF & transfer few Fixed deposit in the name HUF. By doing the same they can claim benefit of minimum amount which is not chargable to tax i.e Rs. 500,000 in his or her individual capacity & in HUF also.
  • HUF is taxed at the same rate as an Individual
  • Returns from the Investment made in the name of HUF are taxed in the hands of HUF.
  • HUF can hold property in its name & can earn rental income from the same

HINDU UNDIVIDED FAMILY

What is Hindu Undivided Family

Hindu Undivided Family as the name suggests is a family of Hindus. There are more Buddhists, Jains and Sikhs: like Hindus are, and can therefore, set up HUFs. The concept of an HUF has basically evolved from ancient Hindu Law. There are two schools of law governing HUFs in India-Mitashara and Dayabhaga and quite a few differences in the rights and obligations of HUF members in each of these school. However, since the Dayabhaga school is largely confined to Bengal, we shall, in this artical, only consider the provisions of the Mitakshara school, which are applicable to the rest of India.

Basic criteria for an HUF

There are some essentail conditions that must be fulfilled to qualify as an HUF. These are outlined below:

  • HUF cannot be formed by one member or co-parcener
  • When a male from the joint family dies, then all the responsibility is given to the female.
  • An HUF need not consist of two male member. One male member is enough. For example, a father and his unmarried daughters may form and HUF.

Important terms which are used in a joint Hindu Family Business:

1. Hindu undivided family:

  • The family who runs or carry on the business organization
  • Hindu Undivided Family includes an eldest male member “Karta” and the other male member called co-parceners.

2. Karta

  • He is the person who is the head and eldest member of the family.
  • Karta is the person who has full control over business activities.

3. Ancestral Property

  • It is the property of forefather or an ancestor and over which the member have equal rights.

4. Co-parceners

  • The male members related to three successive generations.
  • They have equal ownership right over the property of an ancestor.

 Limitations of a Joint Hindu Family Business

Below mentioned are the few demerits of a joint Hindu family business:

1. Limited Resources

  • All the members of joint Hindu Family Business totally depend upon the ancestral property due to their limited liability.
  • Many commercial banks resist extending the credit limit due to the weak financial position of the business.
  • Hence, this will result in limited expansion and growth of the business.

2. Unlimited liability of Karta

  • All the important decision regarding management of various business activities are taken by Karta.
  • But there is a disadvantage with the Karta that he has unlimited liability.
  • Hence, all the business debts are paid by using the personal assets of the Karta.

3. Limited Managerial Skills

  • Sometimes the member suffer due to unfair decisions taken by the Karta in respect of business operations.
  • Unfair decisions are taken due to the lack of managerial skills.
  • So, the Karta cannot be knowledge or proficient in all managerial functions.
  • Nowadays, the joint Hindu family business is declining due to the decreasing number of joint Hindu families in the nation.

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You may contact the author for further information at 9899595719 or acakunalchhabra@gmail.com

Disclaimer: The above article is only for information purpose and is on based on the author’s interpretation of the relevant provision. The same should not be considered as professional advice.

Author Bio

Qualification: CA in Practice
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Location: NCR, Delhi, India
Member Since: 28 Apr 2019 | Total Posts: 11
Experienced Chartered Account with a demonstrated history of working in the accounting industry. Skilled in GST, Income Tax, Internal Audit, Due Diligence, Account Reconciliation, Auditing, and Accounting. Strong accounting professional with a Bachelor of Commerce (B.Com. Hons) focused in Tax Law/Ta View Full Profile

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