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.

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.

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 is formed and how it manages 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:-

1. 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.

1. 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.

1. 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.

1. 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.

PARTITION BETWEEN HINDU UNDIVIDED FAMILY

Partition means division of property. Where the property is capable of admitting a physical division, share of each member is determined by making physical division of the property. On the other hand, where the property is not capable of physical division, partition shall mean such division as the property may admit. 

Though partition can be claimed only by coparceners, the following persons are also entitled to their share in the property:

1. A son in the womb of mother at the time of partition;
2. Mother (gets equal share if there is partition between sons after the death of father).

There is no rule that under a partition the assets need to be distributed amongst the members equally. The assets can be given to a few members to the exclusion of others as long as all the members agree to it. So I would suggest you go for full partition of the HUF assets under which the cash can be distributed equally between both the brothers and then the same can be distributed equally between member of their family. The residential house can be given to members of your family without allotting any share to the branch of your brother’s family. His share in the house can be gifted by you/your family members to your brother and his family members separately under a gift. Since the gift is being given by specified relatives, the same will neither attract any tax in the hands of your brother’s family. The assets distributed at the time of full partition of the HUF are fully tax-free in the hands of the recipient though you may have to pay stamp duty on the partition deed under the stamp duty law of your state. Please note that the full partition deed is not required to be registered with any court. What you are required to do is get the fact of the full partition of the HUF recorded by the assessing officer.

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/