Ingredients of Hindu Undivided Family
Hindu Undivided Family (HUF) or a Joint Hindu Family Consists of all males lineally descended from common ancestor their wives and daughter. Any married Hindu, Sikh, Jain or Buddhist man can form HUF. HUF is automatically constituted on marriage. Few simple formalities to complete for HUF to function as legal entity formed from blending of individual property with HUF character, Gifts, Joint Labour, Will, Partition or Reunion.
There are two schools of Hindu Law i.e. Dayabhaga School of Hindu Law and Mitakshara School of Hindu Law.
CO-PARCENERS of Hindu Undivided Family:
- Some of the members of HUF are designated as coparceners.
- All coparceners are members of HUF, all members are NOT coparceners.
- Husband & Wife form HUF; wife can only be member, NOT coparcener.
- Coparcener is different from the other members of HUF, coparceners are those members who acquires by birth an interest in the joint property of the family.
- Coparcenary is restricted to four levels of living order.
- Daughters also coparcener w.e.f. 9.9.2005 in the Hindu Succession (Amendment) Act, 2005.
- After Hindu Succession Act amendments equal rights to daughters even after marriage. Married women have rights in two HUFs-their father’s as coparcener and their husband’s as member. There’s no need to fill an application form or submit KYC documents for joining an HUF.
- Members if the family who are not coparceners- No right to claim partition.
- 1st Step Form a corpus for HUF can be any CAPITAL ASSET (like property, gold, jewellery, securities, deposits) or CASH.
- Daughter of a coparcener shall by birth become coparcener in her own right in the same manner as son.
- Daughter has the same rights in the coparcener property as she would have had if she had been a son.
- Daughter is allotted the same share as to the son.
Who can be a KARTA of HUF?
The FATHER of the family in absence, senior male member of the family. Unmarried daughter, in the unfortunate event of her father passing away, will become Karta IF All male members are minors & natural guardian is mother then she is the Karta. Where a couple has only one daughter and the husband pass away, the mother-daughter duo can continue the HUF (although a problem may arise after she gets married and becomes a member of her husband’s HUF).
The Karta Have Various Duties that are Managing the affairs of HUF, Maintaining the books of accounts, filing tax returns for HUF, To enter in to contracts, form partnership firm, or representation on behalf of HUF.
Tax Saving through HUF
1. General Benefits: There are Separate exemption limit under Income-tax Act of Rs. 2,00,000, Separate deduction u/s 80G, Separate deduction u/s 80C (Insurance Premium can be paid on life on any member up to Rs. 1 lacks), Separate deduction u/s 80D(Medi-Claim) (Rs.15000), Section 80DD deduction for maintenance including medical treatment of a dependant who is a HUF member, Salary to Karta /Member, Separate Income-tax Deduction on Interest on loan for self occupied House Property in the name of HUF(Sec 24(b)) and There are Separate exemption of Wealth-tax for HUF’s up to Rs. 30 lakhs Wealth and One House- Wealth Tax Free and Productive assets of HUF fully exempt from Wealth-tax.
2. HUF can also take benefits of exemption of capital gain Cost Inflation Index benefit available to Calculate Cost of the Asset, Tax benefit of 20% Tax on Long-term Capital Gains.(Except for non listed shares-Without STT), Saving Tax on Long-term Capital Gain possible by investing in Capital Gains Bonds of NHAI / REC, Long-term Capital Gains Saving by investing in Residential Property, No capital gains to HUF on Distribution of assets on partition.
3. Stock Market, Mutual Funds & HUF: HUF can have a separate Demat Account and can Make money by investing in Primary Market and Secondary Market , Enjoy Tax Free Income for Long-term Capital Gains by holding shares for more than one year(STT Paid), HUF has 2 benefits in investing in IPOs’ i.e. the 2 lakhs limit for the investment to be categorized as retail is not breached and there is a greater probability of more shares being allotted, Enjoy lower tax rate of 15% on Short-term Capital Gains(STT Paid), HUF can also invest in mutual fund.
4. HUF can be a Proprietor of one or more than one Business concerns, Separate name can be kept of HUF business entity. There are No requirement of tax Audit of HUF business if Turnover within Rs.1 crores.(AY-2012-13). The Business Income can be Computation @ 8% without books of account in case turnover is up to Rs. 1Crores – The Presumptive Basis (AY 2012-13)
5. House Property: There are 30% Standard Deduction on Annual value of house property (Rental Income) to HUF u/s 24(a), Self occupied one Residential House & the tax gain specially by way of Interest on Loan & Repayment of Loan u/s 24(b) and Exemption from Wealth-tax on 1 Residential house in the name of HUF.
As per section 10(2) of the Income-tax Act, 1961 any sum received by an individual from Hindu Undivided Family of which he is member is exempt from tax but Amount received not as a member of Joint Family but in pursuance of some statutory provision, etc. would not be exempted in this clause and Member of joint family living apart from the other members does not affect his/her position in law to claim the right as per section 10(2).
Taxation of money received by HUF without consideration
- Provisions of section 56(2)(vi) applicable even to HUF if any sum of money is received by the HUF exceeding Rs. 50,000 p.a.
- Items received in kind subjected to the provisions of sec. 56(2)(vi).
Gift of HUF Property
- Elementary proposition that Karta of HUF cannot gift or alienate property except to the extent recognized under the Hindu Law, namely necessity etc – CGT v. P.Hanumanthappa 68 ITR 363, K.P. Gupta v. CIT 233 ITR 456
- Reasonable limits depends upon facts – CGT v. B.V. Narasimharaju 101 ITR 74
- Karta can make reasonable gifts to daughters – Sushil Kumar & Sons v. ITO 234 ITR 98
- Gift on Marriage Occasion is valid – S. Lakshmamma v. Kotayya AIR 1936 Mad. 825.
- Gift of immovable property should be for pious purpose – CIT v. Ram Gopal Rajgharia 123 ITR 693
- Gift to Strangers void – Guramma v. Mallappa AIR 1964 SC 510.
Gift by a member of HUF
As per section 64(2) a gift by a member of a Hindu Undivided Family after 31-12-1969 would attract Clubbing of Income in the hands of the member and as such the income from the converted property shall be deemed to arise to the individual & not to the family.
Partition of the HUF
Only coparceners can demand partition. These are of two types-
- Total Partition: Property divided amongst all the family, undivided family ceases to exist.
- Partial Partition: Some family members go out of fold and others remain joint or some of the property is divided and other remains joint not recognized for tax purpose, after 31.12.1978
As per section 171(9) of the Income-tax Act, 1961 the Partial Partition after 31-12-1978 is not recognized. Even after Partial Partition the income of the HUF shall be liable to be assessed under the Income-tax Act as if no Partial Partition had taken place.
Procedure to effect partition
- Under the Hindu law HUF may be ended by portioning the property (or whatever assets) of the HUF, but for IT purposes are to be recognized by the AO.
- Share in assets of HUF: All coparceners, mother(in case of death of father), wife gets a share separate from husband in case of partition between her husband and sons, son in womb of mother at time of partition.
- At the time of making assessment u/s 143, 144, it’s claimed by any member that the partition has taken place AO shall make inquiry after giving notice.
- After inquiry AO shall record finding as to whether there has been TOTAL PARTITION DATE of such partition.
- Order u/s 171 passed by AO.
- Where partition took place in the previous year is recorded by AO: Income of HUF before partition shall be assessed as no partition has taken place. Each member shall be liable separately and jointly for the income tax thereon.
- For this section several liability of any member or group of member shall be computed according to portion of joint family property allotted to him or it at partition.
- The provisions are applicable in levy and collection of any penalty, interest fine or any sum for period up to partition date.
- Total partition in the context of the I. T Act means partition by “Metes and Bounds”.
- The Income Tax law will recognize its demise (for want of a better word, since a divided Hindu family can be reunited again),only when the HUF each and every layer of the clothing of property-tangible or intangible, movable or immovable -it had has been removed.
Aadvantages of HUF
- Helps avoid service tax: If business turnover is split by setting up HUF, the service provider can avoid the hassle of charging service tax and become small scale service provider.
- Salary to Karta: This salary is taxed as his income and will be fully deductible from the HUF income.
- Use HUF income for expenses: The income earned by the HUF can be used for the household expenses of the family.
- Distribute income to coparceners: Karta can gift money to the coparceners from the income earned by the HUF. This income is tax-free in the hands of the coparceners. This way, person with a high income will be able to get tax-free income.
- Give loan for business: HUF can give loans to the Karta or coparceners for setting up business & can charge interest on the loan. Interest paid on any business loan is fully deductible.
- No MAT or AMT: unlike other corporate entities, there is no minimum alternative tax on HUF owned businesses.
- Small-scale industry exemption: or the business community, various exemptions and incentives given to small-scale units are crucial to ensuring healthy margins.
HUFs can be made better by the following ways
In May 2005, the government passed a rule PREVENTING HUFs from opening new accounts in the Public Provident Fund. All existing accounts, which had completed 15 years since the initial deposit, were also to be closed by 31 March 2011, HUF CANNOT invest in other government securities such as the National Savings Certificates, as well. These restrictions should be done away with. Why should HUFs be treated differently from any other taxpayer, If the Karta of the HUF is crucial for its smooth functioning, the HUF should be allowed to take a Key man life insurance cover for him and should be made the nominee, Hindu Succession Act accords equal rights to female coparceners of an HUF, its only applicable to the Mitakshara school, it should be applicable to Dayabhaga school (West Bengal and Assam) as well, Kerala does not have a HUF system. For the sake of uniformity, the same rules should apply across the country; HUFs are not eligible for some tax benefits enjoyed by individual taxpayers. They should also be able to claim deduction for interest paid on education loans, benefits for pension fund contributions.
Frequently Asked Questions
Question 1: Can a female also be a karta of HUF? My father was the karta of our HUF. Now he is no more. Can my mother become the karta?
Answer: Yes, a female can become a karta, but only when the male members are minors or are not in a position to manage the affairs and give a declaration to that effect and seek the permission of the Department to allow the female to manage. Champa Kumari Singhi v Revenue (1962) 46ITR81 (Cal).
Moreover, when an existing HUF is reduced to only female members, it can still continue as an HUF with one of the females as a karta. This is in view of the existence of the potential coparcenary as any widow may, in future, induct a coparcener into the family by adoption. CIT v RM AR AR Veerappa Chettiar (’70) 76ITR467 (SC).
Question 2: Under PPF rules, no account can be opened in the name of HUF. However, u/s 80C of the IT Act 1961, an HUF can have a PPF account in the name of any member. Suppose Mr A, the karta, invests Rs 50,000 each out of HUF funds in the PPF accounts of two members of the family — Mr X and Mr Y (both being major sons of Mr A), can the HUF claim deduction of Rs 1,00,000 u/s 80C in its own case?
If for the purpose of PPF regulations the accounts of Mr X and Mr Y are treated as their individual accounts, can they each further invest Rs 20,000 each and claim deduction u/s. 80C in their individual cases?
Whether the aforesaid investments would be in violation of PPF rules which w.e.f. 13.05.05 bar HUF to have any account in its name?
Question 3: Mr A is assessed to tax in his individual capacity. He has deposited Rs 70,000 in his PPF account. He also desires to deposit Rs 30,000 in the PPF account of his major son Mr B and wants to claim deduction of Rs 1,00,000 u/s 80C of the Act in his own (Mr A) case. Of course, in the aforesaid situation Mrs A or Mr B would not claim deduction u/s 80C in her/his case in respect of the said deposit of Rs 30,000. Can Mr A do so and claim deduction u/s 80C up to Rs 1,00,000?
Answer 2 & 3: The answers to all your queries are in the affirmative. The ITA is independent of NSO Rules. In other words, Sec 80C grants a deduction of Rs 1,00,000 for investments in various schemes including PPF. However, PPF rules limit the investment to Rs 70,000. However, you are free to combine Sec 80C and the PPF rules for maximum benefit. Therefore, as PPF rules allow the investor to contribute separately in the name of the spouse or the children and also allows the karta to contribute in the name of the any member, all combined a total deduction of Rs 1,00,000 may be claimed.
Question 4: I am a salaried employee. I have purchased a flat in Mumbai and will get the possession of the flat in April 2007. For that, I had taken a loan of Rs 15 lakh from a bank to be repaid in 20 years on variable rate of interest. I had taken a room for rent of 7,000 per month. For tax deduction claim, I had showed an HRA of Rs 7,000 per month for the whole year. I am paying an EMI of Rs 12,315 for the home loan. The total principal component is 70,000 and interest component is Rs 33,000. I had also made Rs 5 lakh as part-prepayment.
I want to know whether I can claim tax deduction on principal component of loan as EMI and part-prepayment paid in current financial.
Answer: The deduction u/s 80C and the interest u/s 24 are allowed only when the income from house property becomes chargeable to tax. In other words, the construction should be complete, the flat should be ready for occupation and the municipal annual value is known. The interest for the years prior to the year in which the property was completed, shall be deducted in equal installments for the year during which it was completed and each of the four immediately succeeding years. Unfortunately, there is no corresponding provision for the capital repayment.