All About the Hindu Undivided Family (HUF) – Background | Benefits | Drawbacks

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  • 7 Min Read
  • By Taxmann
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  • Last Updated on 10 May, 2024

Hindu Undivided Family

What is Hindu Undivided Family (HUF)?

A Hindu Undivided Family (HUF) is a unique legal and financial entity recognized under Indian law. It's a structure that allows a family of Hindus, including Buddhists, Jains, and Sikhs, to come together and form a collective entity for the purposes of taxation and property management. The HUF is based on the concept that a family could pool its resources and manage them as a single unit.

The HUF system is a reflection of traditional Indian family values and has been adapted into the legal and financial framework to provide families with a way to manage their wealth collectively and enjoy certain tax advantages.

Table of Contents

  1. HUF – Background
  2. What is Hindu Undivided Family (HUF)?
  3. Assets of HUF
  4. Benefits of HUF
  5. Hurdles with Formation and Dissolution of an Hindu Undivided Family 
  6. Conclusion

1. HUF – Background

Taxation works differently for individuals, companies, firms or other entities. One among such entities is Hindu Undivided Family (hereinafter called HUF). It involves a separate and independent set of tax liabilities and exemptions. HUF as a concept was introduced in India to ensure that families stay together and all the earnings of the business stay within the family, thus, ensuring that the control and wealth of the business remains within the family. It is basically an emotion, that has been given a legal sanctity.

2. What is Hindu Undivided Family (HUF)?

HUF is not a creation or result of any codified law governing the country; rather it came into existence only by practice and is now treated as a separate legal entity under the Income Tax Act, 1961 (hereinafter called the Act) just like an individual, a firm or a company. It consists of members who have lineally descended from a common ancestor. Individuals become a member in HUF or get rights in an HUF by birth or as a co-parcener or by marriage with the existing member. It works on the eldest first concept.

Karta is the eldest member of the family. Upon retirement or death of the Karta, the eldest child – male or female becomes the next Karta of the HUF without any changes in the HUF. People who are born in the family automatically become co-parceners of the HUF by birth. Also, any woman who is married to any of the member of the HUF becomes the member of the HUF. Woman gain privilege in such concept as they can be members in two HUFs at the same time viz co-parcener in father’s HUF and member in husband’s HUF. However, husbands of female co-parceners do not get any right in the HUF of wives’ parents.

Jain and Sikh families even though not governed by the Hindu Law, are treated as HUF under the Act.

Like any other business entity, HUF can run its own business to generate income. Also, it can independently make its own investments in mutual funds, shares, precious metals, real estate, etc. | Research | Income Tax

3. Assets of HUF

Any asset received in the following situations would form part of the HUF asset pool:

  • ​Assets received on the partition of a larger HUF of which the coparcener was a member.
  • ​Assets received as gifts by the HUF from friends and relatives.
  • ​Assets received by way of inheritance through a will.
  • ​Individual assets brought in by any member of the HUF to HUF asset pool. However, it won’t be beneficial to the individual member as the tax liability on transfer of asset and income arising thereon will continue to rest in the hands of the member.

4. Benefits of HUF

There are numerous benefits attached to following the HUF system. Some of them are discussed henceforth.

4.1 Tax Benefits

HUF being an independent legal entity is treated separately from its members and has its separate PAN card, creating a separate stream of income. It enjoys basic tax exemption limit like an individual. A member of an HUF enjoys complete tax exemption on any amount of income received from business done by the HUF as the same is taxable in the hands of the HUF. Moreover, deductions u/s 80C, 80D, 80DD, 80DDB, and 80TTA can be enjoyed by the HUF.

4.2 Extending Loans

HUF can extend loans to its members as per the terms and conditions agreed upon. Also, it can take a Home Loan to purchase any residential property and avail tax benefits under Section 80C of the Act for loan repayment and the interest to be paid thereon.

4.3 Investments

Similar to individuals, even HUF can invest in insurance policies and other investment instruments and avail exemptions on payment towards such policies through the year. For instance, an HUF may pay premium on insurance policies for its members and claim benefits for the same. The amount of deductions that can be claimed by HUF independently, being a maximum of Rs. 1.5 Lakhs under Section 80C of the Act.

An HUF is allowed to make investments in Tax Saving Fixed Deposits and Equity Linked Savings Scheme to earn tax benefits under Section 80C of the Act. Although, an HUF cannot hold a PPF Account in its own name, it can avail tax deductions for the amount deposited by the HUF in PPF Accounts of its members on their behalf.

4. Limited Liability

As co-parceners lack control over HUF management, with authority resting solely with the Karta, their liability is confined to their respective share of the property. This equilibrium between power and responsibility is maintained. Moreover, since HUF members are all relatives, a strong sense of loyalty and cooperation prevails, fostering trust and overall collaboration among them.

5. Hurdles with Formation and Dissolution of an Hindu Undivided Family

5.1 Transfer of Property

Since all members of the HUF have the right in the properties and assets of an HUF, the said Joint Assets cannot be sold without the consent of all its members. Thus, implying that at any point of time, a person purchases a property in the name of HUF, it will belong to each of its members’ and not just to the person buying it. This rule creates several issues upon extension of family into several branches, further resulting in several disputes among its members.

As a member owns his/her right in the HUF automatically by birth, he/she cannot bequeath his/her share to anyone. Also, a member by marriage is only entitled to maintenance and gets no share of the HUF.

5.2 Sale of Assets

If the HUF is an owner of the property, the asset can only be alienated or sold in certain circumstances viz. either by the consent of all the co-parceners of the HUF or by the Karta who is the eldest member of the HUF to meet a legal necessity or for the benefit of the HUF wherein consent of all the co-parceners is not required. However, a co-parcener can challenge such a decision of the Karta.

The property can also be alienated or sold by disposing the assets of the HUF in case of a sole survivor of a co-parcener. If a minor child is involved in the HUF, prior permission of the Court is required to create a third-party right in any of the assets of HUF.

Hence, when a property is held in the name of HUF, one has to be mindful of the restrictions on its transfer and on the tax implications arising out of it.

5.3 No Universal Recognition

As discussed aforesaid, an HUF is not recognised universally in any other country, except India; thereby posing a challenge in terms of Income Assessment for members moving abroad or obtaining citizenship of other countries.

Also, an HUF cannot avail Private Equity Fund for the business conducted by it.

5.4 Dissolution in case of Death of or Partition by Members

An HUF may need to be dissolved in case of death of members or in case of partition between the members. Upon dissolution and closure of HUF, all of its properties and assets need to be distributed among its members which can be quite challenging.

The partition of the HUF can either be Total or Partial and the property can be partitioned through a physical division. A Total Partition shall amount to dissolution of the HUF and the entire Joint Family Property being divided among all its co-parceners; the family shall cease to exist as an HUF.

In a Partial Partition, one or more co-parceners and their branch of the family may separate from the others; remaining co-parceners may continue to be an HUF. In such a situation, the share in the HUF properties of the member leaving the HUF is determined and handed over to them.

5.5 Dissolution of Hindu Undivided Family

The right to partition of an HUF lies only in the hands of the co-parceners. Any co-parcener can through a written notice dissolve the HUF. An HUF owning immovable properties can be dissolved by executing a Partition Deed or by filing of a Partition Suit among all the co-parceners. If any of the co-parceners of the HUF disagree to dissolve the HUF through a partition deed, then the same cannot be called as a dissolution of the HUF as the deed only extinguishes the rights of the co-parceners in the HUF agreeing to dissolve by detaching their interest in the joint property and the remaining co-parceners will continue as an HUF.

5.6 Hindu Undivided Family (HUF) Membership Restriction

The policy of excluding non-family members from participation in Hindu Undivided Families (HUFs) poses a significant obstacle to securing additional capital from external sources, thereby diminishing prospects for expansion due to limited financial resources.

6. Conclusion

Thus, a HUF has both advantages and drawbacks. Benefits from HUF can be multiplied and it can serve as a useful tax planning tool, which can be used to maximise one’s benefits keeping in mind the interests of the family. However, it needs to be strategically planned with a long-term perspective. While creating an HUF may be useful for tax planning and investments, one has to always keep in mind issues arising in joint families, the legal challenges it poses in dissolution and partition of entity.

As the family expands, the dissolution process gets tedious and even more complicated. It not only gets emotionally taxing but also legally challenging to carry out the whole procedure of dissolution and distribution of its assets.

Disclaimer: The content/information published on the website is only for general information of the user and shall not be construed as legal advice. While the Taxmann has exercised reasonable efforts to ensure the veracity of information/content published, Taxmann shall be under no liability in any manner whatsoever for incorrect information, if any.

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