Hindu Undivided Families (HUFs) have a unique tax treatment in India, which plays a crucial role in financial planning. This comprehensive guide will delve into the various facets of HUF taxation, including residential status, income computation, deductions, tax regimes, and much more.
Tax Treatment of Hindu Undivided Families
The income taxable in the hands of a HUF and tax liability thereon shall be computed according to its residential status. The income taxable in the hands of an HUF is computed under four heads of income and tax thereon shall be computed as per the tax rates applicable for that previous year. The normal income of HUF is taxable as per slab rates provided under the Finance Act or under the new tax regime under Section 115BAC.
For the purpose of ascertaining tax liability of an HUF, the process can be divided into three broad steps – Determining the residential status, Computation of total income and Computation of tax.
Determination of residential status
The residential status of a HUF depends upon its place of control and management and the residential status of its Karta during the previous year. A HUF can be categorized into the following residential status during the previous year:
a) Resident in India
b) Non-Resident in India
A resident HUF is further sub-classified into the following status:
a) Resident and Ordinarily Resident
b) Resident but Not-ordinarily Resident
A resident HUF is considered as ordinarily resident in India if the following two conditions are satisfied:
- Karta has been a resident in India for 2 or more years out of 10 years preceding the previous year; and
- Karta has been in India for 730 days or more during the period of 7 years preceding the previous year.
If any of the above two conditions is not satisfied, the HUF shall be deemed as a resident but not ordinarily resident in India.
A HUF, which is resident in India, is liable to pay tax in India on its global income. On the other hand, a non-resident HUF is liable to pay tax in India only on those income which accrues or arises or deemed to accrue or arise in India and income received or deemed to be received in India.
However, if the income of an HUF is taxable in India as well as outside India then it can claim foreign tax credit in respect of such income.
Computation of income
Income tax is levied on the total income of a HUF. Thus, it is important to first compute the total income. The total income of a HUF is computed in the following steps:
Calculate income under 4 heads
In Income-tax Act, the income of a HUF is computed in the following 4 heads of income:
(a) House Property
(b) Profits and gains from business or profession
(c) Capital Gain
(d) Income from Other Sources.
Clubbing of income of any other person
A HUF is generally taxed in respect of his own income but in respect of certain income, the Income-tax Act clubs the income of other persons in HUF’s income. Hence, a HUF has to add the income of another person with his own income if clubbing provisions apply in its case.
Set off and carry forward of losses
If a HUF has incurred losses under any head of income then it is allowed to make the following adjustments subject to relevant provisions relating to set-off and carry forward of losses:
(a) Intra-head adjustment, i.e., set-off of losses from one source of income against income from another source taxable under the same head of income.
(b) Inter-head adjustment, i.e., set-off of losses from one head of income against income taxable under another head of income.
If losses cannot be set off in the same year due to inadequacy of eligible profits, then such losses are carried forward to the next assessment year.
Allowability of deductions under Chapter VI-A
The aggregate of income so computed as per aforesaid steps is called ‘Gross Total Income (GTI)’ out of which various deductions are allowed to a taxpayer on account of investments and savings made by it.
Determining total income
The balance income after allowing the deductions is called ‘Total Income’. The total income is bifurcated into 2 parts – Normal Income and Special Income. The normal income of a taxpayer is charged to tax as per applicable tax rates or as per New Tax Regime of Section 115BAC. Whereas, special income is charged to tax at special rates.
Aggregation of agricultural income for rate purposes
The agricultural income is exempt from tax under Section 10(1) but it is included in the total income for rate purpose. The object of aggregating the net agricultural income with nonagricultural income is to tax the non-agricultural income at higher rates.
Computation of tax
For the purpose of calculating the tax liability of a HUF, income shall be first apportioned into normal income and special income. The bifurcation is done as normal income is taxable at applicable slab rates. However, where a HUF opts for New Tax Regime as provided under Section 115BAC1, the tax on normal income shall be charged at the rates as provided under the said section. Whereas special income is taxed at special rates as prescribed under the Act.
A HUF is liable to pay tax on normal income only if it exceeds the maximum exemption limit. Applicability of AMT
Every assessee (other than a company) is subject to Alternative Minimum Tax (‘AMT’) if he has claimed any of the following deductions:
(a) Deduction under any provision (other than Section 80P) included in Chapter VI-A under the heading ‘C- Deduction in respect of certain income’; or
(b) Deduction under Section 10AA; or
(c) Deduction under Section 35AD.
The alternative minimum tax is payable by the HUF if the adjusted total income exceeds Rs. 20 lakhs and the tax payable by it on its total income (computed as per normal provisions of the Act) is less than 18.5% (or 9% in case of a unit in IFSC) of ‘adjusted total income’.
| Computation of tax liability on total income | Amount |
| AMT liability | |
| Tax payable on deemed total income computed as per AMT provisions | xxx |
| Add: Surcharge | xxx |
| AMT after surcharge | xxx |
| Add: Health and Education Cess | xxx |
| Total tax payable as per AMT provisions (A)
Normal tax liability |
xxx |
| Tax on income at normal rates Tax on income at special rates |
xxx xxx |
| Tax on total income Add: Surcharge |
xxx xxx |
| Tax payable after surcharge
Add: Health and Education Cess Total tax payable as per normal provisions (B) |
xxx xxx xxx |
| Gross tax payable [Higher of AMT liability (A) or Normal tax liability (B)] Less:
-AMT Credit -Foreign tax credit under Section 90, 90A or 91 |
xxx
(xxx) |
| Net tax liability Add:-Interest under Section 234A, 234B, 234C-Fees for late filing of return under section 234F |
xxx
xxx |
| Aggregate tax liability Less: Taxes Paid-TDS deducted-TCS collected-Advance tax paid-Self-Assessment Tax |
xxx
(xxx) (xxx) (xxx) (xxx) |
| Total tax payable/ refundable | xxx |
Tax Rates for HUF
Tax Rates (Normal tax regime)
The normal tax rates are prescribed every year under the First Schedule of the Finance Act. The tax rates in the case of a HUF have been enumerated in the below table:
| Total Income (Rs) | Rate |
| Up to Rs. 2,50,000 | Nil |
| Rs. 2,50,001- Rs. 5,00,000 | 5% |
| Rs. 5,00,001- Rs. 10,00,000 | 20% |
| Above Rs. 10,00,000 | 30% |
Tax Rates (New tax regime)
Section 115BAC provides for a new tax regime for HUFs. This provision provides an altogether new tax slab wherein the tax rates have been significantly reduced. However, to avail of the benefit of this tax regime, the assessee has to forgo specified exemptions and deductions.
From the Assessment Year 2024-25, the default tax regime will be the new tax regime. If a HUF does not want to pay tax according to the new tax regime, it will have to explicitly opt out of it and choose to be taxed under the old tax regime. The income shall be taxable at the following rate under new tax regime:
| Total Income (Rs) | Rate |
| Upto 3,00,000 | Nil |
| From 3,00,001 to 6,00,000 | 5% |
| From 6,00,001 to 9,00,000 | 10% |
| From 9,00,001 to 12,00,000 | 15% |
| From 12,00,001 to 15,00,000 | 20% |
| Above 15,00,000 | 30% |
Rate of Surcharge
In respect of a HUF, the rate of surcharge for the assessment year 2024-25 shall be as under:
|
Nature of Income |
Range of Total Income | ||||
| Up to Rs. 50 lakhs |
More than Rs. 50 lakhs but up to Rs. 1 crore |
More than Rs. 1 crore but up to Rs. 2 crores |
More than Rs. 2 crores but up to Rs. 5 crores |
More than Rs. 5 crores | |
| Short-term capital gain covered under Section 111A or Section 115AD | Nil | 10% | 15% | 15% | 15% |
| Long-term capital gain covered under Section 112A or Section 115AD or Section 112 | Nil | 10% | 15% | 15% | 15% |
| Dividend income (not being dividend income chargeable to tax at a special rate under sections 115A, 115AB, 115AC, 115ACA) | Nil | 10% | 15% | 15% | 15% |
| Unexplained income chargeable to tax under Section 115BBE | 25% | 25% | 25% | 25% | 25% |
| Any other income (if opted for the normal tax regime) | Nil | 10% | 15% | 25% | 37% |
| Any other income (if opted for the new tax regime of Section 115BAC) | Nil | 10% | 15% | 25% | 25% |
Health and Education Cess
Every person is liable to pay health and education cess at the rate of 4% on the amount of income tax plus surcharge.
Computation of tax in case of partition of HUF
A Joint Hindu Family consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. There can be no limit to the number of members a HUF may consist of. Only a complete partition of HUF is recognized under the law. HUF partition can be claimed by coparceners only. Income in respect of the post-partition period is taxed as the individual income of the concerned member.
Partition during the previous year
The income of the joint family in respect of the pre-partition period is assessed in the status of HUF. Such assessment shall be made as if no partition has taken place. Further, the deductions and exemptions available to the HUF are to be allowed from such income and tax shall be levied at the rate applicable to the HUF. Each member or group of members is jointly and severally liable for the tax assessed on such income. This liability is in addition to any tax for which he may be separately liable.
Income in respect of the post-partition period is taxed as the individual income of the concerned member. All the provisions applicable to an individual such as rebate, relief and tax rates, etc. will apply to such income.
Partition after the expiry of previous year
Where the partition of the HUF took place after the expiry of the previous year, total income shall be assessed as if no partition has taken place. The deductions and exemptions available to the HUF are to be allowed from such income and tax shall be levied at the rate applicable to the HUF.
Determination of liability of members in case of complete partition
The tax payable in respect of the pre-partition income is to be apportioned between the members in accordance with the portion of the joint family property allotted to them on the partition. Thus, it is to be allocated among the members in the same proportion as the value of the property allotted bears to the total value of the property. The apportionment is not made on the basis of the income-yielding capacity of the different portions of the property allotted.
Determination of liability of members in case of partial partition
Partial partition means a partition which is partial as regards the person constituting the HUF, the properties belonging to the HUF, or both. The partial partition has been derecognised after 31-12-1978.
Tax treatment of HUF – Key Points
1. The alternative minimum tax is payable by the HUF if the adjusted total income exceeds Rs. 20 lakhs and the tax payable by it on total income (computed as per normal provisions of the Act) is less than 18.5% (or 9% in case of a unit in IFSC) of ‘adjusted total income’.
2. A Joint Hindu Family consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters.
3. HUF partition can be claimed by coparceners only.
4. In the case of partition during the previous year, the income of the joint family in respect of the pre-partition period is assessed in the status of HUF.
5. A HUF, which is resident in India, is liable to pay tax in India on its global income. On the other hand, a non-resident HUF is liable to pay tax in India only on those income which accrues or arises or deemed to accrue or arise in India and income received or deemed to be received in India.
Conclusion: Understanding the tax treatment of Hindu Undivided Families (HUFs) involves considering several factors, including residential status, income computation, deductions, and the impact of partition. Effective tax planning can help HUFs optimize their financial situation and ensure compliance with tax regulations. It’s important for HUFs to stay informed about changes in tax laws and seek professional guidance when necessary.
Notes
1The Finance Act, 2023 made this a default tax regime from the Assessment Year 2024-25.
