India is a vast nation where many various religions and faiths are followed. They are subject to various personal laws. The majority of Hindus are also subject to a different set of personal rules regarding domestic matters including succession, marriage, and divorce. A Hindu man can start a HUF as soon as he gets married. It is a benefit that all Hindus receive as a result of Hindu Law about marriage. To make HUF, having children is not required. It’s really easy to create a HUF, but most people aren’t aware that it’s also a good strategy to save taxes.
HINDU UNDIVIDED FAMILY:
Hindu Joint Family or Hindu Undivided Family is referred to as “HUF.” The name alone implies that they would be a large family with several members. According to the Income Tax Act of 1961, the HUF is essentially a special kind of business entity and a separate legal entity. In the Act, the word “HUF” is used in the sense that the Hindu personal laws understand it. The Income Tax Act of 1961 does not define HUF, although Section 2(31) of the Act does include it in the definition of “person.” The legislature intended HUF to have the same meaning as it does in Hindu Law, hence it was left out.
Hindu law mandates that every member of a HUF be a direct descendant of one common ancestor. The family in this instance consists of their wives and unmarried daughters. They live together and engage in communal activities including eating meals, attending church services, and operating a shared estate or business. A HUF includes female members such as widowed daughters who have moved back in with their father and daughters-in-law. After getting married, the daughter stops being a part of her father’s HUF and joins that of her husband. A HUF consists of people who are connected to one another through blood, marriage, or adoption.
The Supreme Court explicitly stated in Surjit Lal Chabra v. CIT that the terms “Joint Family” and “Hindu Undivided Family” are interchangeable. The court continued by explaining that a combined Hindu family also comprises the wives and unmarried daughters of those lineally descended from a common ancestor. After being married, the girls no longer belong to their husband’s family. Except in the cases of reunion (Bhagwan Dayal vs. Reoti Devi) and adoption (Surjit Lal Chhabra), when it is created by the act of the parties, HUF is a creature of law and cannot be created by such an act.
It is a body that is always changing; when a male family member is born, it grows larger; when a family member dies, it shrinks. When a woman marries, she enters the Hindu Undivided Family. A contract cannot be used to generate a HUF. In a Hindu family, it develops naturally. Buddhists, Jains, and Sikhs are examples of non-Hindus who are not subject to Hindu law but are nevertheless recognized as HUFs under the Income-tax Act of 1961.
FAMILY STRUCTURE OF HINDU UNDIVIDED FAMILY:
A married Hindu pair may be regarded as a HUF on their own if they inherit any property. Consequently, a new HUF can only be founded after the birth of a child in the family, whether a male or a girl. Hindu families with only one male member automatically create a HUF when he marries.
Karta, who is typically the oldest living male family member, oversees a HUF. Karta has various special abilities that allow him to control the joint family’s management, upkeep of its members, and distribution of its resources. In case of an emergency or when it is necessary, he may decide to sell the property. Additionally, a manager may receive some management authority from a Karta. The manager does not have to be a HUF family member; they might also be a paid employee.
The position of women as Kartas of a HUF was defined by the Delhi High Court in a landmark decision in 2016. Daughters may also become Karta of the HUF, the court ruled in its decision. This clarification has increased female rights under Section 6 of the Hindu Succession Act, 1956. The HUF is a unit, and the Karta is in charge of representing and managing all of its business. Only adoption by agreement or other means will allow an outsider to join the HUF.
The following can be members of HUF:
- All persons lineally connected in the male line and having a common ancestor.
- Unmarried daughters
- Widows of deceased male members
- Married daughters who have since then returned to their parent’s house after the death of their husband.
- Any person related by adoption
- Son who is born from a marriage between a Hindu male member and a Christian woman under The Special Marriage Act, 1954.
- Illegitimate children are also treated as members of their father’s family.
Consider the dispute between Narendranath and the Commissioner of Wealth-tax. In this decision, the Apex Court ruled that the Wealth Tax Act’s usage of the word “HUF” equates it to the Hindu Personal Law’s definition of a Hindu joint family. A single male member, his wife, and their daughters may make up a joint family in this case, and there is no requirement in the Wealth Tax Act that a HUF be an assessable unit with at least two male members.
They were the male family members, but after the Hindu Succession Act was changed in 2005, gender discrimination was eliminated, giving women equal rights, and daughters are now eligible to be HUF co-members. Only four generations of coparceners are permitted: the father, his son, grandson, and great-grandson. However, women are now coparceners as a result of the Hindu Succession Act’s 2005 revision. But there must have been a common male progenitor for Coparceners. HUF is not based on any kind of physical attribute. A HUF might also be a family without any real estate. From the moment of their birth, a coparcener has a reserved interest in the ancestral property. It’s vital to remember that a coparcener and a HUF member are two different things.
A coparcener is not required to be a member of HUF. However, a coparcener is a HUF member. A man or female who is within 4 degrees of the common male ancestor is referred to as a coparcener. According to the ruling in Gowli Buddanna v. CIT, a HUF can be legally formed by a husband and wife as well as other family members; it is not required for there to be more than one coparcener.
It’s interesting to note that a HUF can exist inside another HUF. For instance, a son can continue to be a member of his father’s HUF while also having his own HUF. He is the Karta in his HUF, but a coparcener in his father’s HUF.
SCHOOLS OF HINDU LAW:
The two main schools of Hindu law are. The two schools are Dayabhaga and Mitakshara. The Dayabhaga school of Hindu law is practiced in Bengal and Assam, the former territory of the state of Bengal. In the remainder of India, Hindu law is dominated by the Mitakshara School.
In contrast to Mitakshara law, Dayabhaga law requires the legal heirs to voluntarily decide to create the HUF rather than its existing by operation of law. In accordance with Mitakshara law, the son or daughter receives a part of the family estate at the time of conception (after a 2005 change to the Hindu Succession Act). The son is not automatically entitled to a share of the family’s wealth under Dayabhaga law. The son has no claim to the family property while the father is still living. In general, the areas of inheritance rules, specific instances of joint family, and a partition are where the 2 schools of Hindu law diverge. A HUF may obtain property through a variety of means, including gifts, wills, existing properties, joint labor, etc. According to Hindu male succession law, a Hindu male’s self-acquired property would pass to his lawful heirs as an individual property. The same rule applies to the portion of the deceased coparcener in HUF, which is independent property and is transferred by survivorship to the other coparcener who is next in succession.
RESIDENTIAL STATUS OF HINDU UNDIVIDED FAMILY:
According to the Income Tax Act, the HUF is a special kind of business entity and a distinct legal entity. Before learning about HUF’s residential status, consider the following:
- Whether the individual earning the Indian income lives within the nation or outside of it and is a non-resident, the income earned in India or Indian income is taxable in India.
- A person’s overseas income is also only taxed in India while they are a resident there. However, a person who does not reside in India is not required to pay taxes on their foreign income.
In terms of income tax, taxpayers are classified into 3 groups based on where they live. As follows:
- Resident and ordinary resident
- Resident but Not ordinary resident
According to the Income Tax Act, the HUF’s residency status is established by making reference to the prior relevant year for a certain assessment year. This indicates that the residential status of HUF fluctuates depending on the pertinent prior year and is not constant for all assessment years.
WHEN HINDU UNDIVIDED FAMILY IS A RESIDENT IN INDIA:
According to Section 6(2) of the Income Tax Act of 1961, a Hindu undivided family is only considered to be a resident of India if management and control of its affairs are wholly or partially located in India. Owning a home in India where some family members live is insufficient. The Karta, or manager of the family, must have resided in India for at least 730 days or more in the year immediately before to the previous year, or at least two of every ten years. Additionally, India should be the country where he maintains and administers his HUF.
HUF residence is additionally decided by whether:
(a) Hindu undivided family is a resident and ordinarily resident in India:
1. The Karta/manager of the HUF is responsible for this. He must have lived in the area for at least two of the ten years directly preceding the current year or two.
2. He must have spent at least 730 days in India during the seven years immediately before the applicable prior year.
Hindu undivided families may reside in India; however they do not typically do so. The Karta/manager is considered to be a resident of India even when he is not typically one if in the relevant prior year he failed to meet either one of the requirements or both of the requirements as stated in clauses (a) and (b).
(b) When is Hindu undivided family a Non-Resident:
A HUF is not considered to be a resident of India if its Karta has been residing outside of India during the assessment year, and all aspects of the HUF’s control and management have been handled outside of India.
TAX IMPLICATIONS OF FORMING A HINDU UNDIVIDED FAMILY:
Taxation of Hindu undivided family:
Let’s look at an example of Mr. A to better understand how a HUF is taxed. After getting married and having children, Mr. A established a HUF with his wife, daughter, and son as its members. After Mr. A’s father passed away, the property was transferred in the name of his HUF because he had no brothers or sisters. Mr. A receives 7.5 Lakhs rupees in annual rental income from his father’s property. Mr. A receives a salary of Rs 20 Lakhs annually. The calculation that will be used to tax Mr. A’s HUF is shown below.
Sources of income of Mr. A before the formation of HUF
- Salary: Rs 20,00,000
- Rent: 7,50,000
- Standard deduction on rent property: Rs 2,25,000
- Net income from rented property: Rs 5,25,000
- Total taxable income: Rs 25,25,000
- Deduction (Section 80C): Rs 1,50,000
- Net taxable income: Rs 23,75,000
- Tax payable: Rs 5,53,625
Sources of income of Mr. A after the formation of HUF
- Salary: Rs 20,00,000
- Rent: Nil
- Standard deduction on rent property: Nil
- Net income from the rented property: Nil
- Total taxable income: Rs 20,20,000
- Deduction (Section 80C): Rs 1,50,000
- Net taxable income: Rs 18,50,000
- Tax payable: Rs 3,91,400
Therefore, it is clear from the example above regarding the tax advantages that one can gain by creating a HUF.
Once a HUF is established, it should have a PAN number and submit a separate tax return. In its income tax returns, HUF is permitted to make deductions and exclusions under Section 80 of the IT Act, 1961. Additionally, the tax rate for HUFs is the same as for individuals. Members may even get a wage that is withdrawn from the HUF’s income if they contribute to the operation of the HUF. A HUF may even purchase insurance in its members’ names.
Tax assessment in case of partition of Hindu undivided family:
Property division is referred to as partition here. The division may be total or partial. When all of the property is divided up, it is distributed among all of the co-owners, and the family loses its status as an intact unit because nothing is still owned jointly. When a co-occurring partner leaves the family, the property associated with his share is given to him, and the remaining family remains a HUF. After partial partition, the HUF is also the owner of the remaining property.
Assessment of Partial partition:
The provisions of Section 171(9) of the IT Act, 1961 permit this, but the following requirements must be met in order for it to happen.
- The partial partition was not permitted to occur before December 31, 1978.
- If the assessee was not a HUF prior, then this partial division should not have occurred, therefore this option is not available.
Both the income sources and the HUF benefits will only belong to the HUF if these two requirements are met.
In the case of Shankaraih Yadav v. ITO, it was decided that the assessing officer under Section 171(9) of the IT Act, 1961 may disregard a partial partition that sets aside certain assets in favor of specific coparceners on the condition that they will not make any claims on the HUF property.
Assessment of Total partition:
The coparceners who were there will now be assessed as individuals individually and not as a HUF as the HUF ceases to exist once the whole division has occurred.
HUFs are losing favor as a result of the changing times and the challenges associated with maintaining them due to their shared assets and complex family structures. It is crucial for a HUF to function as a unit, and this is made challenging when there are differences of opinion and potential for legal challenges. In the past, coupled families made up the majority of households, making HUF as a legal entity make sense.
However, given the current trend toward nuclear families and rising divorce rates, the HUF doesn’t seem to be all that profitable. HUFs can nevertheless be a useful instrument for reducing taxes provided they are effectively planned and put together.
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