HUF: Income Tax Benefits and Drawbacks

HUF - Income Tax Benefits and Drawbacks - TAXSCAN

Hindu Undivided Family (HUF) is a group of people who are all directly derived from the same ancestor, including their spouses and unmarried daughters. A Hindu Family naturally creates a HUF, it cannot be founded through a contract.

 The HUF is considered as a ‘person’ under Section 2(31) of the Income Tax Act, 1961. For the purposes of assessment under the Act, HUF is a distinct entity. The Income Tax Act treats Jain and Sikh families as HUFs even though they are not subject to Hindu law.

The notion of implementation of the Uniform Civil Code (UCC) is becoming increasingly popular in India. Along with other effects, it will have an impact on the HUF idea as an income tax unit. HUF is a legal entity that allows Hindu taxpayers to claim certain benefits. This advantageous tax arrangement will be evaluated for fairness under the law and consistency in application across all faiths if and when the Uniform Civil Code is taken into consideration.

Procedure to form a HUF

  • The first step in the procedure is to write a document called a HUF Deed on stamp paper. The deed must list the Karta (head), coparceners (members), sort of business (if any), and other pertinent information for the HUF.
  • After the HUF Deed has been put into effect, the next step is to apply for a HUF PAN card. To apply for a PAN card, utilise Form 49A, which is available online at the NSDL (National Securities Depository Limited) website.
  • Create a HUF bank account for all of its financial dealings, a HUF requires a separate bank account. The HUF is required to use this specific bank account for all of its earnings and outlays.

Taxability of HUF

In order 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 Income Tax Act). The following points should be keep in mind while computing income:

  • 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).
  • 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.
  • 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.

The following incomes are not taxed as income of HUF:-

  • If a member has converted or transferred without adequate consideration his self-acquired property into join family property, income from such property is not taxable in hands of the family.
  • Income of impartible estate (though it belongs to family) is taxable in the hands of holder of estate and not in hands of HUF.
  • Personal income of the members cannot be treated as income of HUF.
  • “Stridhan” is absolute property of a woman, hence income arising therefrom is not taxable as income of HUF.
  • Income from individual property of daughter is not taxable in hands of HUF even if such property is vested into HUF by daughter.

        Income Tax Benefits to  HUF

  •  Tax Deduction- An HUF is entitled for deductions available under Chapter VI-A of Income Tax Act,1961 while calculating its taxable income.
  • Gifts- Tax-free gifts up to a value of Rs 50,000 are available. Tax benefits under Sections 64(2) and 56(2) of the Income Tax Act are applicable in certain circumstances.
  • Corpus can be used for Investment in Tax-free money instruments.
  • Loan Benefits – As long as the terms and conditions are adhered to, HUF may grant loans to its members. A home loan may also be used to buy any type of residential property, and Section 80C of the Act provides tax benefits for loan repayment and interest payments.
  • Investments benefits – Like individuals, HUF can invest in insurance policies and other investment instruments and take advantage of exemptions on payments made throughout the year for such policies.
  • Public Provident Fund(PPF) Benefit- An HUF may receive tax benefits for the money put in the PPF Accounts of its members on their behalf even if the HUF cannot possess a PPF Account in its own name.

      Drawbacks

  • Without the approval of all family members, the common property cannot be sold, as every member of the family has the same rights on every asset of the family.
  • The HUF may dissolve if partition occurs in a family having less members
  • HUF is losing its relevance as a tax-saving tool, due to conflicts within family
  • A barrier for members migrating overseas or getting citizenship in other nations is the fact that a HUF is not universally acknowledged in any other nation than India.
  • State of Kerela does not consider HUF to be a recognized legal entity. The Kerala Joint Family System (Abolition) Act of 1975 led to the elimination of HUFs in Kerala.
  • A HUF cannot use private equity funds for the business that it runs.
  • All of HUF’s assets and possessions must be divided among its members at dissolution and closure, which might be difficult.
  • HUF only functions if you have a substantial level of income from a variety of sources.

In our present society we will find more nuclear families than HUF and this happens due to differences in opinions, conflict over properties, etc. between families. However, there are families that are HUF and they live together happily taking advantage of the tax exemptions / deductions and other benefits provided by law and dealing with the drawbacks.

It is assumed that the introduction of UCC, once it is adopted, will function similarly to the tax laws. As a result, the income of each individual member will include the portion of income that each HUF member receives in relation to their ownership interest in HUF assets and properties that is not physically divided.

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