HUF AND TAX IMPLICATIONS EXPLAINED

What is an HUF? 

Down the ages, the Hindu community has largely believed in the concept of joint families, joint income and joint property that is shared and enjoyed by all the members of the family. This concept is now recognized as a legal expression in the form of the Hindu Undivided Family (HUF)– a rather efficient tax-planning tool under the Income Tax Act. 

How do you form HUF? As the name suggests, an HUF is a family of Hindus. However, under the tax laws, even Jain and Sikh families can set up HUFs. Typically, an HUF will consist of a person who have lineally descended from a common ancestor, and includes their wives and unmarried daughters. Do note: in Maharashtra, even married daughters are recognised as HUF members. 

While the senior most member is called the karta (manager), the male members are known as coparceners, and the females are referred to as members. In the ordinary sense, an HUF should consist of at least two male members. However, in case the HUF is partitioned, the smaller family that receives the property can constitute an HUF even if it has only one male member. 

What income is regarded as HUF income? All the income that arises on the utilisation of the HUF’s assets and on the investment of its funds is regarded as the HUF’s income that is assessed separately and chargeable to tax. Importantly, the income should have been earned using HUF property or funds or property only; if it arises on account of the personal investments of any member, it will generally be regarded as the individual income of the member. 

 If an HUF contributes funds to the capital of a partnership firm in which it is represented by the karta or any other member who represents the HUF, then the profits and interest received from the firm will be treated as HUF income. This is because the income arises on the investment of HUF funds, and so the income belongs to the family. If, however, the partnership firm also pays the karta (or the member who represents the HUF) a salary for efforts put in by him, the remuneration will be regarded as the individual income of the karta/member. 

It’s important to remember that the same person can be taxed separately as an individual, as well as for and on behalf of the HUF. The two capacities are totally different. And so, the individual and the HUF are totally different units for tax purposes–they are two different assessees. 

Since an HUF is a separately entity, it can earn income from house property, income from business and capital gains, and income from other sources. However, since emoluments are given for personal skills, an HUF cannot earn income from salaries. An HUF can also carry on a business that is managed on its behalf by the karta. It can also hold shares, securities, jewellery and any other valuable articles or articles, apart from movable and immovable property. 

What are the assets of an HUF? Any gift that is given specifically to an HUF can be treated as HUF property. The assets received on the partition of a larger HUF of which the coparcener was a member is also perceived as HUF property is also treated as the property of the HUF. 

Assets can also be bequeathed to an HUF by way of a will that specifically favours the HUF. A point to be noted: in the absence of a will, the assets received on the death of a benefactor after 1956 (when the Hindu Succession Act came into force) will not be regarded as HUF property, but as individual property, even though such assets have been inherited. 

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