All about HUF and Its Taxability

Hindu undivided family has always been a contradictory topic. There have been many judgments passed and challenged. HUF is not defined under The Income Tax Act. But its taxability is covered under the Act. It is created by Hindu, Jains, Sikhs and Buddhists family. The group of individuals must share common roots. Forming an HUF is considered as a rational tax planning step. Just like an individual assessee , HUF is also considered as an assessee distinct from its members. HUF can have its own PAN. One can form an HUF, generate income and pay taxes just like any other assessee. Back in 2018, there was a recommendation made by the Law Commission to abolish the coparcenary concept under Hindu law which basically means abolishing the basis of HUF. This for a while shook taxpayer and their tax planning. Since then there had been no confirmation on this but few fear its abolishment any day. Though, it’s not easy to erode such significant notion.

Composition– HUF consists of Karta, coparceners and members.  The male members of the family were only considered as the coparceners and females were designated as members only. This gender discrimination was eliminated by The Hindu Succession (Amendment) Act, 2005 which came into force from September 9th September 2005 and now females are the coparceners too. Soon after this females could also be designated as Karta where earlier only the senior most male member was designated as Karta. In the case of Mrs. Sujata Sharma vs Shri Manu Gupta & Ors, the Delhi high court held that female coparcener may become Karta of the family.

Husband and wife can also form their HUF if property is received on partition or they have received gift. The donor and donee must clearly state their intention. Wife is considered as member only. Therefore such kind of HUF shall have only one coparcener i.e. Husband. There must be at least two coparceners for an HUF to be taxed. Since in this case there is only one coparcener i.e. husband hence such kind of HUF will not be taxed rather tax liability shall be borne by the only coparcener.

 Wife cannot act as Karta after the demise of her husband. Wife cannot demand partition also. After the demise of the husband, wife cannot claim the right on half of the property (Smt. Asha Rani vs CED on 23^rd July, 1997) as per section 6 of The Hindu Succession Act, 1956. It says “Property within disposing capacity, – Property which the deceased was at the time of his death competent to dispose of shall be deemed to pass on his death.” Different authorities had different opinions in this case. But section 6, 7 and 39 of the Hindu Succession Act, 1956 should be considered if such circumstance arises.

After the death of the male member if HUF consists of the wife and minor kids then wife shall be allowed to act on behalf of the HUF till any of the kids attains the age of majority. Still she will not be regarded as Karta.

Similarly, a married daughter is coparcener in her father’s HUF but a member in her husband’s HUF.

All coparceners are members but all members are not coparceners–   Coparceners are those who are within 4 degrees in lineal descendent from common male ancestor and they can demand partition whereas members have no such right.

HUF signifies a joint family. When an HUF is reduced to a single coparcener, it’s no longer a family hence no HUF. HUF can consist of female coparceners after the death of male ones.

Taxation of HUF

Residential status of HUF

1. Resident- HUF is resident if affairs are controlled and managed partly or wholly from India.
2. Non- Resident- HUF is non-resident if affairs are controlled and managed wholly from outside India.
3. Not ordinarily Resident- If Karta or manager satisfies one or both of the additional conditions (section 6(6)) as specified in case of individual then it is NOR.

Slab

New regime:-

The Finance Act, 2020, has provided an option to Individuals and HUF for payment of taxes at the following reduced rates from Assessment Year 2021-22 and onwards:

Total Income (Rs)	Rate
Up to 2,50,000	Nil
From 2,50,001 to 5,00,000	5%
From 5,00,001 to 7,50,000	10%
From 7,50,001 to 10,00,000	15%
From 10,00,001 to 12,50,000	20%
From 12,50,001 to 15,00,000	25%
Above 15,00,000	30%
Old regime:-
Net Income Range	Rate of Income-tax
	Assessment Year 2020-21
Up to Rs. 2,50,000	–
Rs. 2,50,000 to Rs. 5,00,000	5%
Rs. 5,00,000 to Rs. 10,00,000	20%
Above Rs. 10,00,000	30%

Surcharge is levied on the amount of income-tax at prescribed rates if total income of an assessee exceeds specified limits. The enhanced surcharge of 25% & 37%, as the case may be, is not levied, from income chargeable to tax under sections 111A, 112A and 115AD. Hence, the maximum rate of surcharge on tax payable on such incomes shall be 15%

Relief of section 87A rebate shall not be available to HUF.

Tax is imposed in a similar way as it is in the case of any other assessee. Provisions relating to Audit, ITR filing and submission, TDS and GST are applicable accordingly. For example, if an HUF starts business under its identity then GST and audit turnover limits are applicable. TDS needs to be deducted if covered under any of the relevant section.

HUF can earn various types of income such as capital gain if any of the property is sold at profit. Interest incomes on investments under Income from other sources. But cannot earn salary income.

Deductions available to HUF–

Section 80C, 80G, 80GGA, 80GGC, 80JJAA, 80TTA, 80JJA, 80IBA

Section 80D- If any premium/expenditure is paid for any member of HUF.

Section 80DD and 80DDB- If any medical treatment expense is incurred on any member of HUF.

*HUF cannot claim deduction on same investment/expenditure. For example, If a person has availed benefit of 80C in his personal file then he cannot avail the same exemption twice second being in HUF in which he is Karta.

Exemptions available to HUF– HUF can avail every exemption available under Capital gain.

HUF can also provide loans out of its corpus and earn interest on the same. HUF can also grant interest free loan to its members provided transaction must be genuine.

Income from HUF– HUF might have business income, capital gain, income from house property or other sources. It has an option to either reinvest such income or distribute amongst its members. Members must not receive beyond their stake in the HUF as a whole. Income could be from past years also. At the time of such distribution person should be the member of the HUF which will save him from taxes. Such apportionment of income will not be then taxable in hands of the recipient. As per section 10(2) of the Income Tax Act 1961 subject to section 64, any sum received by a member of a HUF, where such sum is paid out of income of the family or in case of any impartible estate, where such sum has been paid out of the income of the estate belongings to the family shall be exempt from tax. It will be taxable in hands of HUF.

HUF is allowed to spend on the maintenance of the family.

Clubbing provisions– If a member transfers his property to HUF for inadequate or no consideration then income arising from such property shall be taxable in the hands of member (the transferor).

On partition if such property falls under the part of spouse then the income from such property thereafter shall continue to be clubbed with the income of transferor. Because that income shall be deemed to arise to the spouse from the indirect transfer of the property by individual.

Income includes losses also. Where an asset is converted into any other form, still clubbing provision shall apply.

In case of ACIT vs Rakesh S Agarwal (2010) it was held that income from letting out a property sourced from personal funds of a member shall be taxable in the hands of HUF despite of the fact that there was no agreement in name of HUF nor the member had evidence that he acted on behalf of the HUF. Subsequently when HUF repaid back all the amounts for the property, it was proved that the property was for HUF. No clubbing was applied here.

Gifts to and from HUF–

Following gifts received by HUF shall be taxable-

1. Money of more than Rs.50000

2. Movable/Immovable property whose FMV/SDV exceeds Rs.50000.

3. If difference between FMV and consideration of movable property exceeds Rs.50000.

4. If difference between SDV and consideration of immovable property exceeds Rs.50000, SDV being 105% more than consideration.

*Movable property has prescribed list: – Shares and securities, Jewellery, Drawing, Painting, Archaeological collection, sculptures, bullions.

If an HUF receives furniture as gift from non-member of more than Rs.50000 still it’s not taxable as furniture is not movable property

 Gifts are exempt if received by an HUF from any of its members.

Gifts received by members from HUF beyond the above limit shall be taxable.

This has always been a topic of discussion. Some believe that a group of relative is gifting to an individual therefore it is exempt from tax. But it is not same, HUF is altogether a separate assessee. HUF is not relative of any individual member.

In the case of DCIT vs Ateev V. Gala (ITAT Mumbai), it was held that a gift received from a HUF by a member is considered as gift received from a group of relatives and shall be exempt from tax.

 It was illustrated by an example: when an employee retires and rest of the staff decides to gift him on his farewell on behalf of staff club then it is the staff people contributing on individual level ultimately and creating a pool in the staff club. This seems to be correct but imagine if a HUF grows, though it will still be joint family but many would not be covered in the definition of a relative if seen for an individual separately. For example, Mr. A and Mr. B are brothers. They have an HUF along with their kids. Now, Mr. A has a grandson too who is also part of the HUF. HUF wishes to gift to Mr. B’s son. That grandson will not be related to Mr. B’s son.  Moreover, kids of Mr. A and Mr. B are also not related to each other. Hence this notion is not correct that HUF is a “group of relatives” only.

Another judgment was passed in 2019 which was clearer (Pankil Garg vs PCIT (ITAT Chandigarh)). This clearly states that HUF is not a relative, gift from HUF will be taxable in the hands of member. Though  the definition of a relative in case of a HUF has been extended to include any member of the HUF yet in the said extended definition, the converse case is not included that is to say in the case of individual, the HUF has not been mentioned in the list of relatives. The amount received shall fulfill section 10(2) for exemption. There was a difference in the judgments passed and this would lead to multiple litigations therefore observations were made by the PCIT on the merits of the case. The assessee has taken a plea that the aforesaid gift has been received by the assessee out of the income of the HUF and that the same was exempt u/s 10(2).