Hindu Undivided Family

Hindu Undivided Family

The term HUF stands for ‘Hindu Undivided Family’ and comprises all successors of a common male ancestor and includes their wives and unmarried daughters. A HUF consists of a Karta, coparceners, and members. Karta manages the entire business and makes the final decision. Normally, the eldest member (Male or Female) of the family takes the position of Karta. 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 and females who are within 4 degrees of the lineal descendent from the common male ancestor. The relevance of the concept of the coparcener is that only coparceners can ask for partition in the property. The other family members; i.e., other than coparceners in the HUF, have no direct claim over HUF property, but can claim only through the coparceners.

Advantages
  • Separate Legal Entity: HUF is a separate legal entity in the eyes of the law. This entitles HUF to obtain a separate PAN card, file separate Income tax returns, and open bank accounts in the name of the HUF.
  • Tax-Free Gift: Monetary gifts up to INR 50k may be received in cash, cheque, draft, etc. by an individual/ HUF. It is not taxable as per the income tax act. Also, a gift by Karta to his daughter on her marriage is exempted from taxation.
  • Tax Savings: A HUF is taxed separately from its members, therefore, deductions or exemptions allowed under the Income tax laws can be claimed by it separately. For example, if you and your spouse along with your 2 children decide to create a HUF, all 4 of you as well as the HUF can claim a deduction for Section 80C.
Disadvantages
  • Equal Rights of Members: The greatest disadvantage of opening a HUF is that its members have equal rights on the property. The common property cannot be sold without the concurrence of all the members. Any additions to the family, by way of birth or marriage, become a member of the HUF and get equal rights. A HUF can get too large to manage.
  • Partition: Perhaps the worst nightmare of opening a HUF is closing it down. The only way a HUF can be dissolved is by a partition. All members have to agree to dissolve the HUF. Under a partition, assets are distributed to members which can lead to a lot of disputes and can be a lot of legal hassle.
  • Joint Family System Losing Relevance: HUF was recognised as a separate taxable entity by the income tax department. However, in today’s times, where nuclear families are the norm, HUF is losing relevance. Several cases have come to fore where couples or families are fighting it out on common household expenses, forget to pool in of assets. Divorce rates are rising and therefore, HUF as a tax vehicle is losing importance.
  • HUF Continues to be Assessed as Such Till Partition: Once a HUF is formed, you must continue to file its tax returns, unless a partition takes place. Any claim for partition is made to the assessing officer. The assessing officer, on receiving such a claim, must make an enquiry after giving due notice to the members. Income from the property which was partitioned is taxed as individual income of the member. If the member forms another HUF with his wife and children, the income of the property which was transferred from the original HUF is taxed in the hands of new HUF.

Conditions to Form HUF

  • There should be a joint family property or an ancestral property.
  • All the male members of the HUF should be coparceners. In other words, they should have an equal right over the ancestral property or the undivided estate.
  • Ancestral property is defined as the property, which a man inherits from any of his 3 immediate male ancestors, i.e. his father, grandfather or great grandfather. Therefore, property inherited from any other relation is not treated as ancestral property.

Steps for Formation of HUF

The following is a step-by-step guide to HUF formation:

  1. Create an HUF Deed: Although an HUF is automatically created at the time of marriage, it is advisable to create an HUF Deed. HUF Deed is a formal document on Stamp Paper stating the names of the karta and the coparceners (members) of the HUF.
  2. Apply for a PAN Card: Apply for a PAN card in the name of the HUF. It can be done either online or offline via Form 49A.
  3. Open a Bank Account: Open a bank account in the name of the HUF to complete all the HUF transactions.

Once the above 3 steps are completed, the HUF becomes a separate legal entity for the purpose of assessment as per Section 2(31) of the Income Tax Act.

Documents Required for Registration of HUF in India

  • PAN Card copy of Karta
  • Aadhar Card copy of Karta
  • Passport Size Photograph of Karta
  • Specimen Signature of Karta & Family members with their names & relation with Karta
  • HUF Deed

Compliances For HUF

  • Accounting and Book Keeping: It is always advisable to maintain records for business activities of a Partnership firm on cash or accrual basis in order to judge whether these operations are generating a profit.
  • Tax Audit: There is no obligation for a partnership firm under any law to get the accounts except in cases where the turnover of the business in any financial year exceeds 1 Cr. Rupees and gross receipt from profession exceeds 50 Lakh Rupees. In both cases, the audit of accounts is compulsory for a partner under the Income Tax Act, 1961.
  • Income Tax Returns: Income tax filing must be filed by all partnership firms having a taxable income.
  • GST Registrations and Returns: You have to get yourself registered under GST if your annual turnover is more than Rs. 40 lakhs. Also, if you are doing online business (selling through amazon, flipkart etc.), you are required to get a GST number under goods and service tax Act. Once you have registered under GST, then you are required to file monthly or quarterly details of sale and purchases.
  • MSME Registration: You can get yourself registered as Small and Medium Enterprise (SME) under the MSME Act. The application can be filed electronically. Although it isn’t compulsory to register as a SME, it is highly beneficial, especially at the time of taking loan for the business. Also getting Udyog Aadhar Registration will be very beneficial.

Frequently Asked Questions (FAQs)

What is HUF?
HUF stands for Hindu Undivided Family. It consists of all persons lineally descended from a common ancestor, including their wives and unmarried daughters.
Who is the karta of an HUF?
The eldest male coparcener of the HUF is called the karta of the family. He is responsible for all actions taken by the HUF including but not limited to filing of HUF income tax returns.
Who is a coparcener
A person who has a right in the ancestral property by birth and can demand partition in the HUF is called a coparcener. Generally, all the male members of the HUF are coparceners.
Note:As per Delhi High Court decision in December 2015, a daughter can also be the coparcener. A daughter also has legal right on the ancestral property and can ask for partition of the property. However, the female members who were not born in the family and became members by virtue of marriage cannot be coparceners.
Can the members of the HUF and the HUF separately claim deduction under Section 80C?
The HUF being a separate taxable assessee, can claim a deduction under section 80C. However, the member and the HUF cannot claim a deduction in respect of the same investment made or expense incurred.
Can a woman become a karta of the HUF?
In the 2005 amendment to Section 6 of the Hindu Succession Act, 1956, daughters have been put at par with sons. Thus, the female members who were born in the family (daughters) can become karta of the HUF. However, the other female members who came into the family by virtue of marriage cannot assume the role of karta.
What happens if karta of the HUF dies?
When the karta of an HUF dies, the eldest son automatically becomes the karta. It should be noted that even if the deceased karta’s wife is alive, the eldest son or the other eldest male member will become the karta. In case the HUF has no surviving male members following the demise of the karta, the eldest surviving daughter (by birth) will become the karta of the HUF pursuant to 2005 amendment of the Hindu Succession Act, 1956.
Are there any minimum number of coparceners required for an entity to be taxed as HUF?
A HUF can be formed with just two members one of whom is a coparcener. But for an entity to be taxed as a HUF, it should have at least two coparceners. For instance, if HUF consists of only the husband and wife, then there is only one coparcener. So it will not be taxed in the hands of HUF except in the case where the funds are received on the partition of larger HUF. It will be taxed in the hands of a sole coparcener.
Karta of HUF sits outside India. HUF is managed by the other members residing in India. Will HUF be a non-resident?
The residential status of a HUF is determined not on the basis of where the Karta resides but on the basis of where the HUF is managed from. In this case, though the Karta resides outside India, the HUF is managed by members from India and hence the HUF will be a resident of India.
Can a daughter claim a share in her father’s property where her father had passed away before the amendment made in 2005, giving equal rights to daughters and sons?
No. Both the daughter and the father has to be alive on the date of the amendment for the daughter to get the benefit, irrespective of whether she has been married or not on that date. If the father has passed away before the amendment date, then she wouldn’t have been a daughter on the date of the amendment. Hence she cannot claim a share in father’s property.
a. Are there any incomes which are not taxed as income of HUF?
b. The following incomes are not taxed as income of HUF
c. If a member transfers his self-acquired property to the HUF without receiving proper sale consideration, income from such property is not taxable in the hands of the HUF. It will continue to be taxed in the hands of the member.
d. Personal income of the members cannot be treated as income of HUF. “Stridhan” is an absolute property of a woman, hence income from it is not taxable as income of HUF.
e. Income from an individual property of the daughter is not taxable in the hands of HUF even if such property is vested into HUF by the daughter.
What happens if the eldest male member of the family is an NRI?
A HUF is considered to be a resident of India if the control and management of its affairs happen wholly or partly in India. In some cases, the Karta of the family may be non-resident. The resident status of the family will not change to be non-resident only because the Karta is a non-resident unless the decisions concerning the family are made outside India.

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