A Hindu Undivided Family, as its name suggests, is a joint family which is seen as a separate entity from that of the individual members in the HUF. 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.
An HUF is taxed separately from its members. Therefore, deductions (such as under Section 80) or exemptions allowed under the tax laws can be claimed by it separately. For example, if you and your spouse along with your 2 children decide to create an HUF, all the 4 of you as well as the HUF can claim a deduction for Section 80C. HUF is usually used by families as a means to build assets.
HUF has its own PAN and files a separate tax return. A separate joint Hindu family business is created since it has an entity separate from its members.
Deductions under Section 80 and other exemptions can be claimed by the HUF in its income tax return.
HUF can take an insurance policy on the life of its members.
HUF can pay salary to its members if they are contributing to its functioning and work of the joint Hindu family business. This salary expense can be deducted from the income of HUF.
Investments can be made from HUF’s income. Any returns from these investments are taxable in the hands of the HUF.
An HUF is taxed at the same rates as an individual.
One person cannot form HUF. An HUF is formed by a family.
An HUF is automatically created at the time of marriage.
HUF consists of a common ancestor and all of his lineal descendants, including their wives and unmarried daughters.
Hindus, Buddhists, Jains and Sikhs can form HUFs.
HUF usually has assets which come as 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.
Once an HUF is formed it must be formally registered in its name. An HUF should have a legal deed. The deed shall contain details of HUF members and the business of the HUF. A PAN number and a bank account should be opened in the name of the HUF.
HUF consist of co-parceners (who are family members) and the distant relatives, called members of HUF. Co-parceners are the family members and it consists of four levels of lineal descendants including the first male ancestor. It is only a co-parcener who can demand the partition of HUF.
Members of HUF: Any other distant relative who is not a family member (e.g. brother-in-law, sister-in-law, etc.,) would be deemed member of HUF. Although they are members of HUF, they are not the co-parceners. A member cannot demand the partition of HUF.
Disadvantage of forming an HUF: Though HUF seems like the perfect way to save tax as a family, it comes with its own drawbacks.
Equal rights of members: The greatest disadvantage of opening an HUF is that its members have equal rights on the property. The common property cannot be sold without the concurrence of all the members. Any additions to the family, by way of birth or marriage, become a member of the HUF and get equal rights. An HUF can get too large to manage.
Partition: Perhaps the worst nightmare of opening an HUF is closing it down. The only way an HUF can be dissolved is by a partition. All members have to agree to dissolve the HUF. Under a partition, assets are distributed to members which can lead to a lot of disputes and can be a lot of legal hassle.
Under Hindu law, partition of HUF can be of two types: Total and partial partition.
Total Partition: It is a type of partition in which entire family property is divided among the co-parceners. After the total partition HUF ceases to exist.
Partial Partition: It is a type of partition in which some of the willing co-parceners get out of the HUF and rest of them continue the HUF. The partial partition may be property-specific when some of the properties are divided among the co-parceners and balance continue to be the property of the HUF. When a claim of total partition has been made by any co-parcener on behalf of HUF, the assessing officer shall inquire about it. For this, he shall serve a notice to all the co-parceners of the HUF and enquire whether the total partition has taken place and if yes, then on which date it is effected.
HUF continues to be assessed as such till partition: Once an HUF is formed, you must continue to file its tax returns, unless a partition takes place. Any claim for partition is made to the assessing officer. The assessing officer, on receiving such claim, must make an enquiry after giving due notice to the members. Income from the property which was partitioned is taxed as individual income of the member. If the member forms another HUF with his wife and children, the income of the property which was transferred from the original HUF is taxed in the hands of new HUF.
A HUF can be formed with just two members, one of whom is a co-parcener. But for an entity to be taxed as a HUF, it should have at least two co-parceners. For example, when any HUF consist of only husband and wife, then there is only one co-parcener (the wife is a member but not a co-parcener) and therefore, in such case income can’t be taxed in hands of HUF. It 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.
Until January 2016, a woman could not be the HUF Karta. But in a landmark case, the Delhi High Court ruled in favour of a female being the Karta of an HUF. However, the same has not been incorporated in the Income Tax Act as yet.
All the members of the Karta’s family can be members of the HUF. The male members are called coparceners, while the females are referred to as just members. The difference between the two is that any of the coparceners can demand partition of the HUF.
The female members do not have this right in most parts of the country, except for some states like Maharashtra and Tamil Nadu that have allowed unmarried daughters to function as coparceners.
The Hindu Succession (Amendment) Act, 2005 which came into force from September 9th september, 2005 removed this gender discrimination by giving equal rights to daughters as sons.
The daughters become the coparceners of their father’s families on birth in the same manner as sons and have same rights as sons in the family properties.
Since HUF is one person as per Income Tax Act, a proprietor of a business can be an individual or a HUF. A proprietorship concern is not governed by any specific law as such, and therefore there is no bar on HUF becoming a proprietor of any concern.
The concept of HUF may cease to exist if the proposals of a recently released consultation paper on Reform of Family Law by the law commission are accepted.
In 2016, the Ministry of Law and Justice made a reference to the Law Commission of India to examine matters in relation to a uniform civil code. The consultation paper, released in August of 2018, prepared by the law commission discusses the grounds for abolishing the HUF.