Hindu Undivided Family - Explained

This document covers

1. Meaning of HUF
2. Assessment of HUF
3. Ancestral Property
4. Residential Status of HUF
5. Taxability of income received by a member from the Income of HUF
6. Taxability of HUF
7. Incomes not taxable under HUF
8. Deductions applicable to HUF
9. Applicability of Rebate u/s 87A
10. ITR required to be filed by HUF

1. Meaning of HUF

Income Tax Act 1961 has not defined the word “HUF”. As per Hindu law, HUF means a family which consists of all males lineally descended from a common ancestor and includes their wives and daughters.

1. Head of the family is called “Karta” of HUF
2. Members of the HUF are called “Co-Parceners”. They are related to each other and related to the head of the family i.e., Karta.
3. Under Income Tax Act, Jain undivided families of Jains and Sikhs also considered as HUF.
4. The existence of HUF arises from status but not from contract.
5. W.e.f 6th September 2005, daughters are also co-parceners of HUF and they can claim partition. She has same rights in the same manner as son.

2. Assessment of HUF

HUF is treated as separate entity under the Income Tax. It will have separate PAN. Following 2 conditions needs to be satisfied to be assessed as HUF.

1. There should be a co-parcenership. Once a joint family income is assessed under HUF, It continues to be assessed in same manner till partition is claimed
2. There should be a joint family property which consists of ancestral property i.e. , property acquired with the aid of ancestral property and property transferred by its members

3. Ancestral Property

Ancestral property means a property which is inherited from any of three immediate male ancestors i.e., father, grandfather and great grandfather. Hence property inherited from any other relation will not be treated as ancestral property.

Income from the ancestral property held by following families is taxable as income of HUF.

• A family of widow mother and sons (may be minor or major)
• Family of husband and wife, having no child
• Family of two widows of deceased brothers
• Family of two or more brothers
• Family of uncle and nephew
• Family of mother, son and son’s wife
• Family of a male and his late brother’s wife.

4. Residential Status of HUF

1. A HUF would be resident in India if the control and management of its affairs is situated wholly or partly in India.
2. If Karta of HUF satisfied both the conditions below, then the resident HUF will be treated as Resident and Ordinarily Resident (ROR) HUF. Otherwise, it is treated as Resident but not ordinarily resident” (RNOR)
   
   1. If Karta is resident in India in any 2 financial years out of 10 financial years preceding the relevant financial year and
   2. Stay of Karta during 7 financial years immediately preceding the financial year should be 730 days or more.
3. A HUF would be Non-Resident in India if the control and management of its affairs is situated wholly outside India.

5. Taxability of Income received by a member from the Income of HUF

• Section 10(2) exempts the income received by a member of the HUF from the income of HUF.
• Members of HUF are not required to pay taxes on the amounts received from HUF
• This exemption applies only to the payments made by HUF out of the income of the family or income of the impartible estate belonging to the family

6. Taxability of HUF

• If funds of HUF are invested in a company or firm or LLP , Fees or remuneration received by the member as a director or a partner in the company/firm/LLP will be treated as income of the family
• If Fees or remuneration is earned for services rendered by the member in his personal capacity, it will be treated as personal income of member

7. Incomes not taxable under HUF

The following incomes are not taxable under HUF

• If a member has converted or transferred without adequate consideration his self- acquired property into join family property, income from such property is not taxable in hands of the family.
• Income of impartible estate (though it belongs to family) is taxable in the hands of holder of estate and not in hands of HUF.
• Personal income of the members cannot be treated as income of HUF.
• "Stridhan" is absolute property of a woman, hence income arising therefrom is not taxable as income of HUF.
• Income from individual property of daughter is not taxable in hands of HUF even if such property is vested into HUF by daughter.

8. Deductions applicable to HUF

HUF can claim the deductions under Chapter VIA . HUF can claim deduction like 80C, 80D, Home Loan interest etc

9. Applicability of Rebate u/s 87A

Rebate u/s 87A is not applicable to HUF. If the income of HUF is more than basic exemption limit and less than Rs 5 lakhs under Old tax regime/Rs 7 lakhs under New tax regime, it is required to pay taxes. No rebate is applicable

10. ITR required to be filed by HUF

HUF is required to file income tax returns in ITR 2 or ITR 3 or ITR 4 depending on the source of income. HUF cannot use ITR 1 for filing income tax return