This article has been written by Ms. Komal Rawat, a 2nd year student of Lloyd School of Law, Greater Noida, Uttar Pradesh.

INTRODUCTION

 The article aims to present before you the overview regarding  HUF, how it helps joint families to save taxes and what are its pros and cons. In India, joint family culture was prevalent from decades and there was a time when every family was a joint family. It was an extended family arrangement prevalent throughout the Indian subcontinent particularly in India, consisting of many generations living in the same household, all bound by the common relationship. It was an patriarchal society and eldest male member was the head of the family the main positions were with the male members and female members were not given that much importance and values and also the ancestors property were only divided between male members of the family, so all this states that females were not given more values than male members. In modern world, the importance or joint family is decreasing day by day and due to awareness and laws know females are also given same importance as male members of the family. HUF is a peculiar legal and tax entity specific to Hindu Families in India. It provides lots of benefits in tax filing.

What do you mean by Hindu Undivided Family?

Under Hindu Law, an HUF stands for Hindu Undivided Family and it is also commonly known as Joint Hindu Family. It is peculiar to Hindu society only. Hindu Undivided Family is a family which consists of all persons should be Lineally descended from a common ancestor and includes their wives and unmarried daughters of the male ancestors. It is created when any two or three generations from a common ancestor live together in the same house and uses same kitchen for making food. Historically, for many generations India had an unexpected prevailing tradition of joint family or Hindu Undivided Family. It is prevalent in many Indian subcontinent where many generations live together in the same home bound by common relationships and rules. A joint family or Hindu Undivided Family consists of mainly husband and wives their sons and unmarried daughters and their sons wives and children and their grandparents. The same pattern involves and repeats for as many generations as are currently alive. Any number of these people may be deceased, without impacting the legal existence of the family.

HUF is formed with two necessary essentials: i) two- male members, ii) existence of some ancestors. It cannot be created on contract bases. Hindu Undivided Family includes an eldest male member how is considered to be the head of the family is known as ‘karta’ and the other remaining male members are called as coparceners. And the remaining females members of the family are called as members of family . Everything and every important decisions are taken and family is managed by the eldest member of the family and the remaining family has to follow it. 

The Hindu Undivided Family includes essential characteristics which are:- 

1. Karta:- Karta is the male and eldest person in the family and acts as a head of the family and holds important position in the family and manages all the things and takes all the big responsibilities on this shoulders and importantly holds full control over the business and property of the family. Family income flows into a common pool, from which resources are drawn to meet the needs of all members, which are regulated by the heads of the family as he is holding all the responsibilities of the family.

1. Coparceners:-  As defined by the Hindu Succession Act of 1956, every individual born into an HUF automatically acquires the status of a coparcener at birth. This includes both sons and daughters, who are bestowed with equal rights and obligations concerning the family’s property. They are the remaining male members of the family and belongs to three lineal descendants. They also hold equal ownership rights over the property of the ancestors which means that man inherits from any of his three immediate male ancestors , i.e. father, grandfather and great grandfathers.

1. Members:- These are the remaining females of the family. They are the members of the family but do not hold any important positions in the family and just take advantage of the property and things but they cannot demand their right over there.

1. Application of Mitakshara law: HUF operates under the tenets of the Mitakshara School of Hindu Law. This implies that property within the HUF is distributed by means of survivorship.

Under Section 2(31) of the Income Tax Act, 1961 HUF is treated as a ‘person’. Hindu Undivided Family is a Unique Legal and tax entity specific to Hindu Families in India and had a separate Legal entity for the purpose of assessment under the Act. HUF has its own PAN and file tax returns independent of its members. Only Hindu Laws and Income Tax Laws gives legal recognition to HUFs, also the Jain and Sikh families even though are not governed by the Hindu Law, but they are treated as HUF under the Act. This is in addition to the individual tax exemptions that apply to each of its members. This benefit is applicable regardless of whether the HUF is categorized as resident or non-resident.  Also by forming HUF you can save taxes by creating a family unit and pooling in assets to form a HUF.  A HUF is taxed separately from its members, therefore, deductions such as under section (80) of the Income Tax Act or exemptions allowed under the tax laws can be claimed by it separately. For example, if you and your spouse along with your two children decide to create a HUF, all four of you as well as the HUF can claim a deduction for section 80C. HUF is usually used by a families as a means to build assets.

How HUF managed their Funds?

For managing their businesses and funds they have to function it as a one which is HUF where regardless of many persons HUF will be considered as a single person which also helps in tax savings and they get exemptions under the tax laws. There are four main points which is necessary to do to manage their funds are:-

• Create HUF Deed:- Although for creating HUF Deed is not compulsory or mandatory to form it is just an part of procedure and one should made it for its benefits and for the proper functioning of HUF. This is a formal document made on the stamp papers on which names of Karta , Coparceners, members and name of HUF would be mentioned. Normally, Karta’s name is the name of HUF (ex:- Karta + HUF). They have to mentioned are initial capital of the HUF and more importantly before starting an HUF you have to take declarations from all the family members to start an HUF.

• Apply for PAN:- As HUF is a separate Legal entity so HUF can apply for a PAN card under form 49A and file tax returns independently.

• Open Bank Account:- Bank account should be opened on the name of Karta or HUF and the authority to run the account and sign the cheques which can be delegated further is with the Karta. Also, there should not be any personal entry mentioned if any case mentioned than reverse it.

• Transfer Assets to HUF:- HUF’s can be fund by any gifts which can be given from any relatives and all , it can be funded by Ancestral Property which is transferred by will or money from sale of that ancestral property and also for raising funds can take loans form it’s members but have to return back within reasonable time frame with reasonable interest.

Pros of Hindu Undivided Family ( HUF)

• Controlled & Managed:- Everything is controlled and managed by the Karta and he is sole owner of the HUF he has to make all the necessary decisions and bear all the authority and responsibility. Karta had full right to fully take his own decisions and form all the business on his part in order to grow business. 

• Decisions:- Karta is the head of the HUF and having a experienced person so it is his decisions which are followed throughout the HUF, he is not bound by any member he can consult from everybody but it is his power to take his sole decisions in order to grow business.

• Limited Liability:- In HUF, all members liability is limited as on part of there contribution they have to pay off that much amount only in order to pay liability members doesn’t have to sale their properties.

• Stability in business:- In HUF, there is a stability in business as it keeps on going from generations to generations which help HUF’s to grow and in case of any losses there are many members to help them so HUF business there is a stability.

• Increased Cooperation & Loyalty:- HUF is formed by a family members where there is not any strangers so it would be easy for every members to put up their point of views and things and as HUF is made by family members so there would be greater Loyalty and cooperation for the growth of business and each and every member will able to support and their will not be any gossips and chaos. 

Cons of Hindu Undivided Family (HUF)

• Limited Resources:- In HUF, you have only limited about of resources as it is started form your ancestral property and if you do not have rich ancestral property you cannot expand your business as in HUF you can not demand or take capital from outside of the family so it have only limited amount of money. It is only dependent on the contribution of the family members.

• Unlimited Liability of Karta:- As in HUF in case of any losses the rest of the members will provide only that much money which they have to contribute to the HUF, they do not have to sale there property in order to pay the losses but Karta have to sale his property also if the loss is not pay off completely. This is a great disadvantages for Karta as he have to solely bear all losses of the business.

• Dominance of Karta:- In HUF, all the decisions and control is in the hand of the Karta which created dominance of Karta and also create sometimes conflict between the members as only one person is the head and only he is taking the major decisions as sometimes he might be wrong and the business can go in losses. Sometimes, members are dissatisfied with the decisions of Karta but due to his position they are not able to say anything which also creates conflict among the family members.

• Limited Managerial Skills:- In HUF, it the Karta who is sole head of the HUF if he is not enough smart or good, not educated that much and don’t have sense to handle all the responsibilities and pressures of the business then in this case a severe breakdown in the HUF family can take place which will result in losses and will not be able to grow further. Also, it is not possible that in one person each and every quality can be there.

CONCLUSION

Under Hindu Law ,Hindu Undivided Family is just considered as a joint family who lives together with having common ancestor relationships and common ancestral property. In HUF, father, grandfather and their great grandfathers live as three generations together it is patriarchal in nature as the head of the family is the male. Thus, an HUF has both pros and cons and benefits from HUF can be multiplied and it can serve as a useful tax planning tool, which can be used to maximize one’s benefits keeping in mind the interests of the family. Therefore, it needs to be strategically planned with a long-term perspective and then formed in order in a longer run. 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.

REFERENCE:-

Bharat’s Hindu Undivided Family Formation Management & Taxation By CA PAWAN K JAIN Edition 2023

https://incometaxindia.gov.in/pages/i-am/huf.aspx

https://www.taxmann.com/post/exam/hindu-undivided-family-huf?amp

https://www.legalserviceindia.com/legal/article-8923-joint-hindu-family.html

https://www.business-standard.com/about/what-is-hindu-undivided-family

https://www.toppr.com/guides/business-studies/forms-of-business-organisations/joint-hindu-family-business/