I believe you must have heard about the word Hindu Undivided Family. Most of people think that this is a person which are created by some kind of Agreements or by law. Well, if you are also one of them then it’s time to bust your myth about HUF. Because the fact is something far different from that we understand about HUF. So, let’s understand the concept in a bit depth:
What is the Hindu Undivided Family?
A Hindu Undivided Family (HUF), is a Joint Family that is taken as a separate entity from that of the Individual Members consisting of Hindu Undivided Family. 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 and other persons are called members.
How to create HUF?
As HUF does not arise from a contract but, it is a Creation of Law. After marriage as soon as a child is born, the Hindu Undivided Family comes into existence. Hindu, Buddhists, Jains, and Sikhs can form the Hindu Undivided Family. Hindu Undivided Family normally 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.
Individuals are part of HUF?
HUF consist of Co-Parceners (who are Family Members of Karta) and the distant relatives i.e. called Members of HUF.
Who are Co-Parceners and Members?
Co-Parceners: Co-Parceners are the Family Members of Karta and it is consists of 4 levels of Lineal descendants including the first male ancestor. It is only a Co-Parcener who can demand the Partition of the Hindu Undivided Family. It will include the following:
- Mr. A (Karta)
- Son/ Daughter of Mr. A
- Grandson/Granddaughter of Mr. A
- Great Grandson/ Great Granddaughter of Mr. A
Note: Hindu Undivided Family can’t be expanded over the above 4 lineal descendant lines
Members of Hindu Undivided Family: 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 Hindu Undivided Family. Although they are Members of Hindu Undivided Family, they are not the Co-Parceners. A member can’t demand the partition of the Hindu Undivided Family.
Imp. Note: The wife is not considered as the direct part of the Hindu Undivided Family i.e. Co-Parcener. She will be a Member of the Husband’s family Hindu Undivided Family. But, she will be a Co-Parcener in her Father’s Property.
ALL MEMBERS ARE NOT CO-PARCENER, BUT ALL CO-PARCENERS ARE MEMBERS.
Partition of HUF?
Under Hindu Law, Partition of Hindu Undivided Family can be of 2 types:
- Total Partition;
- Partial Partition;
Total Partition: Total Partition is a type of Partition in which entire family property is being divided among the Co-Parceners. After the total partition, Hindu Undivided Family ceases to Exist.
Partial Partition: It is a type of Partition in which some of the willing Co-Parceners get out of the Hindu Undivided Family and the rest of them continue the Hindu Undivided Family. It 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.
Assessment after Total Partition:
When a claim of total partition has been made by any Co-Parcener on behalf of the Hindu Undivided Family, the Assessing Officer (AO) shall inquire about it. For this, he shall serve a notice to all the Co-Parceners of the Hindu Undivided Family and enquire whether the total partition has taken place and if yes, then on which date it is affected.
If the Partition of the Hindu Undivided Family 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 Hindu Undivided Family. The Several liabilities of a Co-Parcener would be proportionate to the share of joint family property allotted to him at the time of such partition.
Some Important Points:
a. Is there any minimum number of Co-Parceners required for an entity to be taxed as HUF?
A Hindu Undivided Family can be formed with just two members one of whom is a Co-Parcener. But for an entity to be taxed as a Hindu Undivided Family, it should have at least two Co-Parceners. For example; when any Hindu Undivided Family consists 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 Hindu Undivided Family. It will be taxed in the hands of Individual Co-Parceners of HUF.
b. Can Hindu Undivided Family pay remuneration to Karta or Any Member of Hindu Undivided Family?
Yes. As per Supreme Court (SC) decision in Jugal Kishor Baldeo Sahai Vs. CIT, such remuneration would be deductible if it is paid under below situations:
Under a valid and Bonafide Agreement; and in the interest of and expedient for the business of family; and reasonable and not excessive.
c. What is the position of the Married daughter in HUF?
Unmarried daughters would always be a Co-Parcener in HUF and have the equal right over the property just like a Son. Although, the Status of Married Daughters would be as follows in HUF:
In Her Father’s Property: She will remain a Co-Parcener in her father’s property even after the marriage.
In her In-Laws Property: She will always be a Member but Not the Co-Parcener. Although, the Husband can give his Co-Parcenary right to her wife in his father’s property.
d. Can HUF run a Sole Proprietorship Business?
Since Hindu Undivided Family is one person as per Income Tax Act, a Proprietor of a business can be an individual or a HUF. A Proprietorship firm is not governed by any specific law as such, and therefore there is no limitation on Hindu Undivided Family (HUF) becoming a Proprietor of any firm and also The Hindu law remains silent in this case.
Resource: INCOME TAX, ICAI 2019
