I believe you must have heard of Hindu Undivided Family (HUF). Most of the people think that this is a person which are created by some kind of Agreements etc. Well, if you are also one of them then it's time to bust your myth about that. Because the fact is something far different from that. So, Let's understand the concept in a bit detail:
1. What is HUF?
A Hindu Undivided Family (HUF), as its name suggests is Joint Family which is taken as a separate entity from that of the Individual Members consisting in HUF. The Head of the Family (i.e. Father/ any elected person in case of the death of Father) is called Karta which operates the business of the HUF.
2. How HUF is created?
HUF does not arise from a contract. But, it is a Creation of Law. After marriage as soon as a Child is Born, HUF comes into existence. Hindu, Buddhists, Jains, and Sikhs can form HUF. HUF usually has assets which come from a Gift, a will, or ancestral property, or property acquired from the sale of joint family property or property contributed to the common pool by members of HUF.
3. Which Individuals are part of HUF?
HUF consist of Co-Parceners (who are Family Members) and the distant relatives i.e. called as Members of HUF.
4. Who are Co-Parceners and Members?
Co-Parceners: Co-Parceners are the Family Members and it is consist of 4 levels of Lineal descendants including the first male ancestor. It is only a Co-Parcener who can demand the Partition of HUF. It will include the following:
- Mr. X (Karta)
- Son/ Daughter of Mr. X
- Grandson/Granddaughter of Mr. X
- Great Grandson/ Great Granddaughter of Mr. X
Note: HUF can't be expanded over the above 4 lineal descendant lines
Members of HUF: Any other distant Relatives who are not the Family Member (e.g. Brother-in-law, Sister-in-law etc.) would be deemed as the Member of HUF. Although they are Members of HUF, they are not the Co-Parceners. A member can not demand the Partition of HUF.
Imp. Note: Wife is not considered as the direct part of HUF i.e. Co-Parcener. She will be a Member in Husband's family HUF. Although, She will be a Co-Parcener in her Father's Property. ALL CO-PARCENERS ARE MEMBERS, BUT ALL MEMBERS ARE NOT CO-PARCENER.
5. Partition of HUF?
Under Hindu Law, Partition of HUF can be of 2 types: Total Partition & Partial Partition;
Total Partition: It is a type of Partition in which entire family property is being divided among the Co-Parceners. After the total partition HUF ceases to Exist.
Partial Partition: It is a type of Partition in which some of the willing co-parceners get out of the HUF and rest of them continue the HUF. The Partial Partition may be property specific also when some of the properties are divided among the co-parceners and balance continue to be the property of the HUF.
Under the Imp. Note:[Income tax Act, ONLY TOTAL PARTITION IS RECOGNISED, partial partition is not considered as a partition.]
6. Assessment after Total Partition:
When a claim of total partition has been made by any Co-Parcener on behalf of HUF, the Assessing Officer shall inquire about it. For this, he shall serve a notice to all the Co-Parceners of the HUF and enquire whether the total partition has taken place and if yes, then on which date it is affected.
If the Partition of the has been affected in the previous year, the total income of the HUF of the previous year up to the date of partition shall be the Total Income of HUF. EVERY MEMBER SHALL BE JOINTLY AND SEVERALLY LIABLE for the tax on such assessed income of HUF. The Several liability of a Co-Parcener would be proportionate to the share of joint family property allotted to him on such partition.
7. Some Important Points:
Is there any minimum no. of co-parceners required for an entity to be taxed as HUF?
A HUF can be formed with just two members one of whom is a co-parcener. But for an entity to be taxed as a HUF, it should have at least two co-parceners. For example; When any HUF consist of only Husband and Wife, then there is only one co-parcener (because the wife is a member but not a co-parcener) and therefore, in such case income can't be taxed in hands of HUF. It will be taxed in the hands of Individual Co-Parceners.
Can HUF pay remuneration to Karta or Any Member of HUF?
Yes. As per Supreme Court decision in Jugal Kishor Baldeo Sahai Vs. CIT, such remuneration would be deductible if it is paid:
- Under a valid and Bonafide Agreement; and
- In the interest of and expedient for the business of family; and
- Reasonable and not Excessive.
What is the position of the Married daughter?
Unmarried daughters would always be a Co-Parcener and have the equal right over the property just like a Son. Although, the Status of Married Daughters would be as follows:
In Her Father's Property: She will remain a Co-Parcener even after the marriage.
In her In-Laws House: She will always be a Member but Not the Co-Parcener. Although, Husband can give his co-parcenary right to her wife.
Can HUF run a Sole Proprietorship Business?
Since HUF is one person as per Income Tax Act, a Proprietor of a business can be an Individual or a HUF. A Proprietorship concern is not governed by any specific law as such, and therefore there is no bar on HUF becoming a Proprietor of any concern.
The author can also be reached at taxeffects.blogspot.com or niteshkbind@gmail.com.
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