What is HINDU UNDIVIDED FAMILY (HUF)?
Under the Income-tax Act, a Hindu undivided family is treated as a separate entity for the purpose of assessment. The term “Hindu undivided family” has not been defined under the income-tax Act. The expression is however, defined under the Hindu law, as a family which consists of all the persons lineally descended from a common ancestor and includes their wives and unmarried daughters. The relation of Hindu undivided family does not arise from a contract but arises from its status. Though Jain and Sikh families are not governed by the Hindu law, such families are treated as Hindu undivided families for the purpose of the purpose of the Income-tax Act. Head of the family is known as KARTA. The Karta is the oldest male family member. In the event of the death of the Karta, his eldest son becomes the next Karta, who will be followed by the next son in line if the eldest son does not want to be the Karta. If there are no sons, the unmarried daughter can become the Karta in the unfortunate event of the death of her father. If the Karta passes away, the assessing income tax officer should be intimated of his death and the appointment of the new Karta.
Previously only male adults are called coparceners (those persons who acquire by birth an interest in joint family property) but with the introduction of Hindu Succession (Amendment) Act, 2005 from September 6, 2005, daughters also are given coparcener status but only under Mitakshara School of law.
Different schools of Hindu law:
There are two schools of Hindu law- Dayabhaga and Mitakshara.
Dayabhaga: This school of law prevails in West Bengal and Assam. Under this school of law a son does not acquire any interest by birth in an ancestral property. Son acquires such interest only after the death of his father. Thus, the son does not enjoy the right to demand partition during the lifetime of his father. In view of this, the father enjoys an absolute right to dispose of the property of family according to his desire. It can thus be said that there is NO COPARCENER in Dayabhaga School of law till the death of father. After the death of father, sons become coparceners in respect of property left by father and income arising there from is taxable as income of Hindu undivided family.
Mitakshara: This school of law applies to whole of India except West Bengal and Assam. The coparcenary under this law is a fluctuating body which is enlarged at the time of each birth and reduced at the time of each death of a coparcenary child.
BENEFITS OF FORMING AN HUF:
1) HUF is eligible for deductions under section 80D (Insurance premium paid on health of its members), 80G (Donation), 80L (income from bank and post office deposits), 80C (assorted list of items) under Income Tax Act, 1961.
2) A HUF also enjoys exemptions under section 54 and 54F in respect of capital gains.
3) HUF also gets advantage of slab rate taxability.
4) Also, under Wealth Tax Act, 1957 HUF is treated as a distinct entity and enjoys separate taxability.
Basically the logic behind forming an HUF is to avail the benefit of an extra PAN card legally. As the income of the family is not taxed in the hands of any specific individual, a new PAN card is allotted to the HUF and tax would be paid by the family using this PAN card.
As a new PAN card would be allotted to the whole family, it will also enjoy the benefits of Income tax slab rates i.e. Income would be tax free up to specified limits and would then be taxed progressively at 10%, 20%, and 30%.
There are certain gifting rules that should be kept in mind, these are as follows:
1. When a donor (giver of a gift) gives a gift in cash or in kind, it might be taxable in the hands of the donee, which in this case is the HUF.
2. If the donor gifts movable or immovable property for less than its market value to the HUF, the HUF has to pay taxes on the deemed fair value of the gift.
3. Previously, cash gifts under Rs. 50,000 were tax free. If the gift was more than Rs. 50,000, then the entire amount was taxable. Now, any gift received either in cash or in kind of a value more than Rs. 50,000 is taxed in the hands of the HUF as ‘Income from Other Sources’.
4. Gifts from relatives of members of the HUF (who will be the donees) are exempt from this rule.Relatives here includes the following:
- Spouse of the donee,
- Spouse’s brother or sister,
- Brother or sister of the donee,
- Spouse of brother or sister of the donee,
- Donee’s parent’s brother or sister,
- Donee’s parent’s brothers or sisters spouse,
- Lineal ascendant or descendent of the donee or donee’s spouse.
5. Gifts at the time of marriage are exempt from tax, whether from a friend, relative or colleague. Hence if a member of the HUF is getting married, the gift can be made to the HUF, and it will be exempt from tax in the hands of the HUF.
6. Movable or immovable property received through a Will by way of inheritance is exempt from tax.Any income received by the HUF can be further invested into various investment avenues such as shares (through the HUF’s demat account), mutual funds, fixed deposits, property and so on, and the profit or interest earned will be taxable in the hands of the HUF, as it is income of the HUF.