What is an HUF?
An HUF, or a Hindu Undivided Family, is a separate tax entity in addition to individual persons who are members of such a family. If you are Hindu, Buddhist, Jain or Sikh, you can have an HUF as a separate tax entity. You can claim all tax benefits under Wealth Tax and Income Tax. An HUF is eligible for those exemptions that are available to a resident Indian who is not a senior citizen. It can own property and also have its own business.
Who all are included in the HUF?
The HUF includes those persons who, by birth, acquire an interest in some joint family property. It also includes all lineal descendents of these persons, and their wives, and children, both sons and daughters.
Who are the parties in an HUF?
An HUF includes the following parties:
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.
Coparceners
All the male members are called coparceners. This includes the sons, grandsons and great-grandsons of the karta, who holds the joint family property. These coparceners acquire an interest in the family property, by virtue of their birth. A coparcener has the right to demand that the family property gets divided, so that they can receive their share in the property, or in whatever assets the HUF holds. Following are the allowed coparceners:
- Holder of the property
- Sons and daughters
- Grandsons
- Great-grandsons
A daughter continues to be a coparcener even after her marriage, regardless of whether she is a member in her husband's HUF.
Members
The female members of the family, this includes wives and daughters (married or unmarried) are called members. Members do not have coparcenery rights.
How does an HUF come into being?
An HUF automatically comes into being as soon as you get married. Hence an unmarried man cannot form an HUF and be his own HUFs karta, but he can still be a member or coparcener of his family's HUF. No formal action is required to form an HUF.
How does one infuse capital into the HUF?
In order to infuse capital into the HUF, you have to initiate the following steps:
a) Open a bank account in the name of the HUF (the bank will provide the format for the karta of the HUF to open the savings account)
b) Apply for a PAN Card for the HUF
c) Transfer assets / property to the HUF
Keep in mind clubbing provisions and tax on gifts to the HUF
Points to be kept in mind when creating capital for the HUF
When creating capital or infusing capital into the HUF, keep the following points in mind:
a) Do not transfer your own assets or funds into the HUF. Any income arising from this asset / money will be clubbed with your own income and you will be taxed on it.
b) If there is ancestral property and there is income earned on this property, this property can be property of the HUF and any income on this property can be classified as HUF income
c) If ancestral property or assets are sold, the money received on such a sale can be transferred to the HUF
d) Suppose there is no ancestral property, then one way of infusing capital into the HUF is by way of gifts. Gifts received by members of the HUF on occasions such as birthdays or marriage are exempt from tax up to a maximum value of to Rs. 50,00/-
Rules to be kept in mind when the HUF receives gifts?
There are certain gifting rules that should be kept in mind, these are as follows:
a) 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
b) 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.
c) 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.
However there are some exceptions:
(i) 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
- Spouses 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.
(ii) 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.
(iii) 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 HUFs 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.
Deductions & exemptions available to the HUF
- To start with, as the HUF is a separate entity in the eyes of the taxman, it is entitled to a basic exemption of Rs. 2,50,000, just like a Resident Indian (male). This means that any income earned in the year up to Rs. 2,50,000 is not taxable. All the tax slabs are the same as those for a resident Indian (male).
- Over and above this, the standard Section 80C deductions apply to the HUF as well. This means that the HUF can invest its income earned (either earned through salary, or business, or property, or investments) into any of the 80C avenues i.e. LIC premium paid (for life insurance of its members), NSC, ELSS, PPF (invested for its members) and so on. Section 80 CCF
- An HUF can also invest into long term infrastructure bonds and claim a deduction under Section 80 CCF Section 80 D.
- If the HUF is paying for mediclaim premium for its members, it can avail a deduction up to Rs. 15,000 (Rs. 20,000 if the member is a senior citizen) under Section 80 D Section 80 DD
- An HUF can also claim a deduction up to Rs. 50,000 for medical expenses, rehabilitation or training expenses incurred for the maintenance of a disabled member of the HUF, under Section 80 DD.
- Capital Gains on House Property If any property that is held by the HUF is sold and there is capital gain, the HUF can save tax on these gains by reinvesting the proceeds into another property as per the standard rules (purchase a new property within 2 years, or construct a property within 3 years), and also has the option of investing the gains into NHAI or R EC bonds for the standard 3 year lock in period.
- Interest earned on these bonds is taxable in the hands of the HUF. If you are planning on buying a second house, it would be advisable to hold it in the name of the HUF, if possible.
Thought Process of HUF
Under the Mitakshara school, the thought followed is that the property does not belong to any one member, it vests in the HUF itself. Hence partition can be done within the karta's lifetime, and is not restricted to after the death of the karta. Here, the shares are not defined, they fluctuate with births and deaths of coparceners in the family. When a son is born, he automatically gets entitled to a share of the property.
Some more deductions / exemptions available to the HUF to save tax
a) If an HUF owns properties which are given out on rent, the standard deduction of 30% is applicable on rental income earned, for maintenance of the properties.
b) As the HUF is a separate tax entity in the eyes of the IT Act, it is entitled to exemption up to Rs. 30 lakhs from wealth tax.
Blending of assets in an HUF
Blending of assets or property is when a coparcener includes his own assets or property into the assets of the HUF. Blending implies that if partition of the HUF were to take place immediately after the blending, each member would be entitled to only a certain part of the blended asset. In this manner, blending is more beneficial than gifting. This is because after blending of assets, any income that is earned from the asset or property, less his own share, is clubbed in the hands of the donor, whereas in the case of gifting, the entire amount is clubbed.
Partitioning of the HUF
Partitioning is when the HUF status is severed, and the HUF no longer exists. This happens when assets are divided amongst the members of the HUF. There is no longer any joint ownership of these assets.
- Partial partitioning is not allowed as per the IT act because this is against the very concept of an "undivided family"
- Full partitioning of the HUF is the only viable option. In full or total partition, all the members are no longer members of the HUF, and all the properties are no longer properties of the HUF. All assets and properties are dissolved and distributed and the HUF itself ceases to exist, once all its assets are distributed or its shares are taken. For recognition of a partition under tax laws, partition of immovable assets i.e. property is necessary to be done by The division must happen in such a manner that the members do not end up being co-owners of the asset. For example, suppose one of the assets of the HUF is a Bank FD. In this case, if all the members end up being joint holders in their own shares, of the FD, then technically this asset continues to be an asset of the HUF, hence any interested that accrues on this asset will continue to be taxable income of the HUF. To resolve this issue, a single member will have to claim ownership of the FD and will have to fairly compensate the other members for their share in the FD i.e. he will have to pay them the interest they would have earned, keeping appropriate taxation in mind.
A word of caution
Under Hindu Law, you can fully partition your HUF, but under IT Law, you have to take care not to be dissolving your bigger HUF simply to make a number of smaller HUFs to claim that much more tax deduction & exemption. If you do so, the law may frown upon you, and might take action against you as well. However, it is possible to form smaller HUFs within the bigger HUF. So, a son can be the karta in his own HUF, while being a coparcener in his father's HUF.
All female HUF
Yes, there can be a all female HUF. Suppose a married couple have only one child, a daughter. In case of the death of the father, the mother and daughter can continue the HUF. There have also been case laws stating that the unmarried daughter of a couple, where the father has passed away, can be the karta of the HUF, until she gets married, if she has no brother.
Transferring property by Will
If a person wants to transfer some property to a member of the HUF through a Will, this property can instead be transferred to the smaller HUF of the male member of that family. This will save a lot of tax that would otherwise have been paid.
Summary
Considering the fabulous tax advantages of having an HUF as a separate entity, it is advisable for every possible person to adopt this means of legally saving taxes.
Cheers
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