CHARTERED ACCOUNTANTS

What is HINDU UNDIVIDED FAMILY (HUF) AND TAXATION OF IT.


Q.1 What is the meaning of Hindu Undivided Family?
Ans. 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.
Q.2 What is a Hindu Coparcenary? In what ways is it different from a HUF?
Ans. 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 commonmale 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.
Q.3 What is the difference between a co-parcener and a member?
Ans. 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.
Q.4     What are the advantages of HUF under Tax Laws?
Ans. 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.
Q.5 How a HUF can be created ? Who can be members of a HUF?
Ans. 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.
Q.6 Which are the states in which HUF is not recognized?
Ans. 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.
Q.7 Is a HUF necessarily resident in India?
Ans. 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.
Q.8 An HUF is having all the properties in India. The Karta of the HUF is residing outside India permanently and the female members are staying in India and are managing the affairs of the HUF. What would be the status of such HUF?
Ans. As discussed in the earlier answer, 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 incomein the hands of HUF and small HUFs of the sons, in a legal manner, thereby more assessees 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.




 

avandia