HUF and Tax Implications

What is HUF?

A Hindu Undivided Family otherwise known as HUF is a joint family.  It is a separate entity which differentiates it from Individual members.  Let us now see its special features and the Tax implications:

1. The Head of the family, who can the Father or the elected person in case of the death of the father, is known as KARTA.
2. KARTA operated the business of the HUF.
3. Hindus, Buddhists, Jains and Sikhs can form a HUF.
4. Usually HUF has assets which originates through a gift, a will or ancestral property or for that matter any property acquired from sale of Joint family property or property contributed to the common pool by members of HUF.
5. HUF consists of Co-parceners who are the members of the family and also distant relatives known as members of HUF.
6. Co-parceners who are the family members consists of four levels of lineal descendants which includes the first male ancestor.
7. It is only the co-parcener who can demand the partition of HUF.
8. Just two members can form a HUF and one of them will be the co-parcener.

 HUF MEMBERS:

• Any distant relative who is not a family member like brother-in-law, Sister-in-law etc would be the deemed members of the HUF.
• Though they are the members of HUF they are not the co-parceners.
• A member cannot demand for partition of HUF.

 Partition of HUF:

• Under Hindu law, partition of HUF can be of two types viz Total Partition and Partial Partition.
• Total Partition: It is a type of partition wherein the entire family property is divided among the co-parceners.  After the total patition HUF ceases to exist.
• Partial Partition: Here some of the willing co-parceners get out of the HUF and rest will continue in the HUF. The partial partition may be related to property specific when some of th eproperties are divided among the co-parceners and the balance will continue to be the property of the HUF.
• When a claim of total partition is made by any co-parcener, the assessing officer in order to make an inquiry will send notices to the co-parcners as to whether total partition has taken place and if so, from which date it has been effected?

HUF- Tax Implications:

For an entity to be taxed as a HUF, there should be minimum of two members.

Example:

• If Husband and Wife are the two members, then there is only one co-parcener (wherein the wife is only a member and not a co-parcener).
• In such a case income cannot be taxed in hands of HUF and will be taxed in the hands of individual co-parceners.
• Unmarried daughters would always be a co-parcener and have the equal right over the property just like a son.
• The status of a married daughter in her father’s property is that of a co-parcener.
• Since HUF is one person as per Income Tax Act, a proprietor of a business can be an individual or a HUYF.
• A proprietorship concern is not governed by any specific law. Hence there is no bar of HUF becoming a proprietor of any concern.

**SOURCE: TAX GURU