1. what is “hindu undivided family”?
The expression “Hindu Undivided Family” has not define under the income tax act or in any other statue. A Hindu undivided family is a separate legal tax entity under the provisions of Sec.2(31) of the income tax act 1961. It is a body consisting of persons lineally descended from a common ancestor and include their wife’s and unmarried daughters. The daughters on her marriage ceases to be a member of her fathers huf and becomes a member of her husband’s huf. However, after the commencement of hindu succession (amendment) act on 1st September 2005, daughter married or unmarried, is a co-parcener like a son. The concept of an HUF has basically evolved from ancient Hindu law. There are two schools of law governing HUF’s in India which are Mitakshara and Dayabhaga. There are quite few differences in the rights and obligations of huf members in each of these schools. However, since the dayabhaga school is largely confined to Bengal, but we will consider only the provisions of the mitakshara school; which are applicable to the rest of the india.
- Essentials of an HUF:-
a. There should be a family i.e. group of persons- more than one.
b. As a name suggest an huf is a family of hindu’s. however even Buddhists, Jains, Sikhs are regarded as hindus, and can therefore , set up huf’s.
c. They should be undivided i.e. living jointly and having commonness amongst them.
All these three essentials are cumulative.
However, the huf can be best defined as a family that consist of a common ancestor and all his lineal male descendants and their wives and unmarried daughters. The huf can not be created by act of any party. The only expectations are in the case of an adoption or marriage, when stranger may become a huf member. An undivided family, which is a normal condition of hindu society, is ordinarily joint, not only in estate but also in food & worship.
2. What should be the basic criteria for creating an HUF?
There are some basic conditions that must be fulfilled to qualify as an HUF. These are outlined below:-
- Only one member or co-parcener cannot form an huf;
- An huf need not consists of two male members, one male member is enough. For example- a father and his unmarried daughters may form an huf;
- The joint family continues even in the hands of females after the death of the sole male members.
Karta:-
The person who manages the affairs of the family is known as the karta. Normally, the senior most member of the family acts as a karta. However, a junior male member can also act as karta with the consent of the other members. This was held in Narendra kumar j.modi vs Seth govindram sugar mills 57 I.T.R. P510(SC).
3. Who can be the members/co-parceners of a huf?
All the members in your family including your wife, children, their wives and their children. While the male members are called co-parceners, the females are referred to as members. The senior most male member is called karta (manager), and a typical huf consist of a karta, his sons, grandsons, and great-grand sons(all of whom are co-parceners) and their wife and unmarried daughters(all of whom are members).
Birth of a male in a hindu joint family makes him a co-parcener of the huf. In view of this all male members automatically becomes members of the huf. In addition to that of child is adopted then he also becomes a member of the huf. Moreover upon marriage, wife becomes a member of her husband’s joint family. Female child remains a member till marriage, only male can be a co-parceners. This is changed now after 1st sep.2005 daughters are co-parceners like sons.
4. What is the difference between the members and a co-parceners?
A huf, as such, can consist of a very large number of members including female members as well as distant blood relatives in the male line. However, out of this, coparceners are only those males(now daughters also) who are within 4 degrees in lineal descendent from the common male ancestor. The relevance of concept of coparcenary is that only coparceners can ask for partition. The other male family members i.e. other than coparceners in a huf, have no direct claim over huf property, but can claim only through the coparceners.
5. How does a huf come into existence?
The concept of joint family under the hindu law as well as the huf in income tax act 1961 is broadly the same. A huf is a fluctuating body, its size increases with birth of a member in the family and decreases on the death of a member of the family.
“females go and come into huf on marriage”. If there is family nucleus, there need not to be more than one male member to form a hindu undivided family as a taxable entity under the income tax act. The expression Hindu undivided family in the income tax is used in the sense in which a hindu joint family is understood under the personal law of the hindus. Under the hindu system of law a joint family as an assessable entity must consist of atleast two male members(refer Gowli buddanna vs CIT(1966)60ITR293(SC) ). Where a coparceners having a wife and minor daughters and no son receives his share of joint family properties on partition, such property, in the hands of the coparcener, belong to the huf of himself his wife and minor daughters.
6. What are the right’s of the members/coparceners in the huf?
The difference between a coparcener and a member is that a coparcener can demand partition of an huf. This is by way of distribution of huf property among the coparceners. While each coparceners would then be entitled to a share of the property, the members would be entitled to receive maintainance from the huf. The karta generally manages the family property, which is regarded as the joint property of all the coparceners.
A huf, as such can consist of a very large nember of members including female members as wwell as distant blood relatives in the male line. However, out of this coparceners, are only male(now daughters also) who are within 4 degrees in lineal descendent from the common male ancestor. The relevance of concept of coparcenary is that the only coparceners can ask for the partition. The other male family members .i.e. other than coparceners in a huf, name no direct claim over huf property, but can claim only through the coparceners.
7. What income is taxable as huf income?
Any income that arises on the investment of huf (like, interest earned on loans given by an huf ) or on the utilization of huf assets (like rent earned on letting out huf property) would be regarded as huf income. It is important that income be earned using huf funds or property only. If the income arises on account of the personal exertions of the karta or any other member and not on investment of huf funds, such income would generally be regarded as the individual income of the karta or the member.
If an huf contributes funds to the capital of a partenership firm, profit & interest received(from the firm) by a partner who represents the huf is regarded as huf income. This is because the income in the partener’s hands arises on investement of the huf’s funds. However, if the karta is also paid a salary by the firm for efforts put in by him, such funds would be regarded as the karta’s individual income.
Speculative profit can be regarded as the income of huf; particularly in cases where the huf has paid margin money or any deposits for such transactions.
8. Assets of an HUF
- Assets received in the following situations would be regarded as the assets of an huf:-
- Assets received on the partition of a larger huf of which the coparceners was a member (like an huf in which the coparceners father or grandfather was the karta).
- Assets received as gifts by the huf, such gifts could be received from close relative or close friends.
- Assets bequeathed by a will that specifically favour’s the huf. In the absence of a will, assets received on the death of a benefactor after 1956(when the hindu succession act came into force) would not be regarded as huf property, but as individual property even though such assets have been inherited.
Although, it is possible for a member of the huf to transfer his other individual assets to the huf, such a transfer isn’t beneficial from the tax point of view. This is because there is no transfer of the tax liability on the income of such assets.
9. Branches of HUF
An huf may have several branches, let us take the example of an huf with two sons, when the sons marry and they have their own families, they will form a branch of the HUF. Likewise, when the grandsons have families, they too will be sub-branches of the HUF. It is immaterial if they possess any property or not.
10. How setting up an huf can minimize your’s family tax liability?
Let, us explain with the help of an example. Assume that you are a hindu married salaried individual and you also own an ancestral property.
Your salary is 30 lacs p.a. and you get a rental income of Rs. 5 lacs p.a. from your ancestral property. Let us assess your total income tax payable into 2 scenarios :-
Scenario 1:- You own the property as an individual (i.e. the property is in your name).
Amount(R.s.)
|
Tax assessment |
Individual |
|
Salary |
3000000 |
|
Add:Rent from ancestral prop. |
500000 |
|
Total income |
3500000 |
|
Less:Total saving u/s 80c. |
(100000) |
|
Net taxable income |
3400000 |
|
Less:Tax slab |
(30%) |
|
Tax payable |
850000 |
Scenario2:- Your HUF own the property (i.e.the property is in the name of HUF).
Amount(R.s.)
|
Tax assessment |
HUF |
Individual |
Total |
| Salary | 3000000 |
– |
3000000 |
| Rent from ancestral | |||
| Property |
– |
500000 | 500000 |
| Total income | 3000000 | 500000 | 3500000 |
| Tax saving u/s 80C. | (100000) |
– |
(100000) |
| Net taxable income | 2900000 |
– |
2900000 |
| Tax slab | (30%) | (10%) |
– |
| tax payable | 700000 | 30000 | 730000 |
Therefore, in the above example, you can save 1.2 lacs tax p.a., if your ancestral property is owned by your HUF . The difference in the tax liability is because the individuals and the HUF are treated as two separate tax entities. If, you own the property, then the income from the property will be taxed as per your income tax slab. However ,if your HUF owns the property,then it will be taxed at the income tax slab of the HUF. Since, the HUF’s income falls in a lower tax slab in this example, the tax rate is much lower. Further, your HUF also qualifies for separate 80c deduction, the 80c deduction of your HUF is separate from 80c. deduction that you can claim as an individual . so, if your huf is able to make 80c investment like insurance premium, pps, then your tax liability is lower.
Author Bio
TDS @ 5% on rent for HUF is applicable when any HUF is paying rent to us. Please advise if TDS @ 5% or 10% is applicable when we are paying rent to any HUF