HUF for Tax Planning

The expression “Hindu Undivided Family” has not defined under the Income Tax Act or in any other statute. Hindu Undivided Family (“HUF”) which is same as joint Hindu family is a body consisting of persons lineally descendant from a common ancestor, including their wives and unmarried daughters, who are staying together jointly; joint in food, estate and worship. The daughter, on her marriage, ceases to be a member of her father’s HUF and becomes a member of her husband’s HUF. You can do better tax planning with HUF.

Essentials of the HUF : The essentials of the Hindu Undivided Families are:

• One should be Hindu, Jains, Sikhs and Buddhists are considered as Hindus but not Muslims or Christians;
• There should be a family i.e. group of persons – more than one; and
• They should be undivided i.e. living jointly and having commonness amongst them.

All these three essentials are cumulative. It is a body consisting of persons lineally descended from a common ancestor and includes their wives and unmarried daughters, who are living together, joint in food, estate and, worship (not now necessary). The daughter, on her marriage, ceases to be a member of her father’s HUF and becomes a member of her husband’s HUF. However, after 1-9-2005, daughter married or unmarried is a coparcenar like a son.

Points to be noted for HUF:

• Karta – A Karta is the person who manages the affairs of the family. It is not necessarily required that the senior most member should be the Karta of an HUF. Any other male member of the family can be the Karta with the consent of the other members of the family.
• Coparceners – The person who acquires by birth the interest in the family property. The coparcener enjoys the right to enforce partition.
• The HUF continues to exist in the hands of the female members after the death of the male member.
• Adopted child can become the member but he cannot become the coparcener.
• The daughter after her marriage ceases to be a member of her father’s HUF. After marriage she becomes the member of her husband’s HUF.
• A widow cannot be the Karta of the HUF as she is not the coparcener.
• HUF is a separate entity for income tax purposes under the provisions of Section 2(31) of the Income Tax Act.

A Hindu Coparcenary is a much narrower body within Hindu Undivided Family.Generally speaking, it is a body of individuals who acquires interest by birth in the joint family property. They are the son, grandson and great grandson of the holder of the joint property for the time being. The coparcenary, therefore, consists of a common male ancestor and his lineal descendants in the male line within 4 degrees, running from and including such ancestor. No coparcenary can commence without a common male ancestor though, after his death, it may consist of collaterals such as brothers, uncles, nephews etc. The essence of coparcenary is community of interest and unity of possession. You should also see the taxation of HUF, to better know the taxation of HUF.

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 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.

The Income-tax Act, 1961 as well as Wealth-tax Act, 1957 recognise HUF as an independent assessable or taxable entity. This is done by specifically including “Hindu Undivided Family” in the definition of “person”, in section 2(31) of the Income-tax Act. As such, the income earned by such HUF will enjoy all exemptions and deductions; including the basic exemption from income-tax, so far as applicable.The Income Tax Act and Wealth Tax Act recognize the HUF as an independent assessable or taxable entity.HUFs enjoy all deductions and exemptions under the Income Tax Act independent of the income and tax liabilities of its members.

HUF is a creature of law. It cannot be “created” by act of parties, except in rare cases of adoption and reunion. Birth of a son in a Hindu joint family automatically makes him a member of the HUF. In view of this, all male members automatically become members of the HUF. In addition to that, if a child is adopted, then he also becomes a member of the HUF. Similarly, in case of reunion of erstwhile HUF family members, such reunited members become members of the reunited HUF. Moreover, upon marriage, wife becomes a member of her husband’s joint family.

Schools of law under HUF – Two schools of law are there in order to create a HUF:

• (1) Dayabhaga – It is prevalent in West Bengal and Assam. As per this school of law, the son acquires the right in the family property only after the death of his father.
• (2) Mitaakshara – It is prevalent in rest of India under which, the son acquires the right in the family property right from his birth.

Kerala is the State in which the HUF is not recognized. This is done by Kerala Joint Family System (Abolition) Act, 1975 with effect from 01.12.1976.

No. Section 6 of the Income-tax Act, 1961 clearly contemplates a situation where a HUF can be non-resident also. In fact, HUF can also be Not Ordinarily Resident. A HUF will be considered to be resident in India unless, during the previous year, the control and management of its affairs is situated wholly outside India. In such a case, it will be treated as non-resident HUF. Moreover, in case of a HUF whose manager has not been resident in India in nine out of ten previous years preceding the previous year or has, during the seven previous years preceding that year, been in India for a total 729 days or less, such HUF is to be regarded as Not Ordinarily Resident within the meaning of the Income-tax Act, 1961. As such, it is not necessary for a HUF to be resident in India.

Taxation of HUF

Individual resident below 60 years of age (i.e. born on or after 1st April 1953) or any NRI / HUF / AOP / BOI / AJP *

Surcharge: Nil

Education Cess: 3% of the Income Tax

The test is not where the Karta resides; the test is where the control and management of the affairs of HUF is situated. Even if a part of control and management is situated in India, such HUF will be treated as resident in India. Though, generally, Karta is supposed to manage the affairs of HUF, it is not an absolute rule and, by consent, the power of control and management may be delegated to other members of the family, either fully or partially.

As such, in this case, the status of HUF would be resident in India.Since HUF is deemed to bea distinct entity, it is widely prevalent to transfer certain sources of income in the hands of HUF and small HUFs of the sons, in a legal manner, thereby more assesses are created to divide the tax burden. Besides, an HUF may be used as tax planning device in a number of other ways, like partitions, re-unions of the partitioned families, family settlements/arrangements, renunciations, releases by the existing HUFs, payment of salaries to KARTA/members of the family, etc.

HUF funds may be invested in any source of income such as shares, securities, share in partnership Through KARTA, house property, etc. Deductions from gross total income of HUF are available as in case of an individual, generally.

Tax planning through HUF -

• Increase the number of assessable units through the device of partition of the HUF.
• Create separate taxable units of HUF through will in favour of HUF or gift to HUF.
• Enter into family settlement / arrangement.
• Payment of remuneration to the Karta and also to other members.

Other Tax Planning –

• Transfer of individual property to the family.
• Family reunion after partition.
• Inheritance by succession
• Providing loans to the members of the HUF.
• Gift to members.

Legal aspects and partition of HUF –

• Assets distribution in the course of partition would not attract any capital gains tax.
• No gift tax liability.
• No clubbing of incomes u/s. 64.

Surcharge: Nil

Education Cess: 3% of the Income Tax