HINDU UNDIVIDED FAMILY (HUF)-All you need to know
An HUF is a family which consists of all male lineal descendants from a common ancestor, and also the spouses and unmarried daughters of the descendants. While the male members are called coparceners, the females are referred to as members.
The senior-most male member is called the karta, and a typical HUF consists of a karta, his sons, grandsons, and great-grandsons (all of whom are coparceners), and their wives and unmarried daughters (all of whom are members). Even Jain, Buddhist and Sikh families can have HUFs.
FORMATION OF HUF
An HUF automatically comes into existence as soon as a child is born to a Hindu couple.So a new HUF can come into existence after birth of a child in the family whether it is a boy or a girl. However, a married Hindu couple itself can constitute as an HUF if any ancestral property is received by it on partition. Once the HUF is created, a bank account should be created in the name of the HUF. After that, a PAN number will also be generated in the name of HUF.It is always advisable to have a written agreement as the Banks and Income Tax Dept ask for the HUF Deed.
ASSESSMENT OF HUF
An HUF is recognized as a separate assessable entity under the Income Tax Act, 1961. Its income may be assessed if following two conditions are satisfied:
1. There should be a coparcenership. Therefore, once a joint family income is assessed as that of HUF, it continues to be assessed as such in subsequent assessment years till partition is claimed by coparceners.
2. There should be a joint family property which consists of ancestral property, property acquired with the aid of ancestral property and property transferred by its members.
ROUTES TO CREATE HUF CAPITAL
HUF’s Capital can be created through following routes:
1. Gifts received from relatives of HUF: Gifts received from the members of HUF are not taxable. As per section 56(ii) of the IT Act, such gifts do not attract any tax and are fully exempted. It is one of the easiest routes taken by HUF members in India to create wealth and add momentum to the existing capital.
NOTE:For gifts received from outside persons of value less than INR 50,000, there is levy of tax. This condition is applicable only for gifts received from non-related persons of the HUF.
2. Marriage gifts to members of HUF: Gifts received during the marriage of any of the members of HUF from within the HUF or outside are fully exempt from income tax. On the contrary, gifts received during marriage of a daughter member of the HUF are taxable.
3. Ancestral Property: Ancestral property belongs to the whole family i.e. the HUF. It can be transferred to the HUF to create capital.
CAPITAL ADDITION THROUGH INCOME GENERATION
With the existing capital in hand, the HUF can engage in creating additional income and generate further capital. The entity is allowed to earn from all legalized ways except by way of salary. It can engage in:
(i) any business
(ii) investing in real estate property which could result in Short term or Long-term Capital gains
(iii) market linked investment options such as shares and mutual funds
(iv) income through rental property, etc.
TAXABILITY OF HUF
To compute the income of an HUF, one has to first ascertain its income under the different heads of income (ignoring incomes exempted under sections 10 to 13A of the Act). The following points should be kept in mind while computing income of HUF:
1. If funds of an HUF are invested in a company or a firm, fees or remuneration received by the member as a director or a partner in the company or firm may be treated as income of the family (if fees or remuneration is earned essentially as a result of investment of funds).
2. However, if fees or remuneration is earned for services rendered by the member in his personal capacity, it will be treated as the personal income of the member.
3. If any remuneration is paid by the HUF to the karta or any other member for services rendered by him, remuneration is deductible from income of HUF if such payment is genuine and not excessive and paid under a valid and bona fide agreement.
Incomes are not taxed as income of HUF:-
(a) If a member has converted or transferred without adequate consideration his self-acquired property into joint family property, income from such property is not taxable in hands of the family.
(b) Income of impartible estate (though it belongs to family) is taxable in the hands of holder of estate and not in hands of HUF.
(c) Personal income of the members cannot be treated as income of HUF.
(d) "Stridhan" is absolute property of a woman, hence income arising there from is not taxable as income of HUF.
(e) Income from individual property of daughter is not taxable in hands of HUF even if such property is vested into HUF by daughter.
COMPUTATION OF INCOME OF HUF
Steps to calculate income tax of HUF are as follows:
1. The Gross Total Income of a HUF shall be computed under the four heads of income. There can be no income under ‘income from salaries’
2. Clubbing provisions are applicable in the case of a HUF. However, Section 64 is not relevant to HUF as it is relevant in the case of the individual assessee only.
3. Set-off of losses is permissible while aggregating the income under different heads of income.Carry forward and set-off of losses of the past years, if allowed, is permissible.
4. The income calculated above is entitled for deductions available under Chapter VI-A (as applicable). Deductions under Sections 80C to 80U will be allowed.
NOTE: Rebate under section 87A is not available to HUF.
RATE OF TAX
(i) An HUF is taxed on same slab rates which are applicable to an Individual.
(ii) An HUF is liable to pay Alternate Minimum Taxif the tax payable is less than 18.5% (including cess and surcharge) of "Adjusted Total Income" subject to prescribed conditions.
CA PALAK S JAIN
CMO, Financial Analyst, Expertbells Consulting Pvt Ltd
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