Income Tax and the Hindu Undivided Family (HUF)

Introduction

A Hindu Undivided Family (HUF) is a unique entity recognized by the Indian tax system. It is a family unit that includes all persons lineally descended from a common ancestor. The HUF is taxed separately from its members, providing potential tax benefits.

An important aspect of an HUF is the concept of coparceners. A coparcener is a person who shares equally in the inheritance of an undivided property. In an HUF, the senior-most male member is known as the ‘Karta’. The Karta has the authority to manage the affairs of the family. The original coparceners of an HUF are the sons, daughters, and the Karta. After the amendment of the Hindu Succession Act in 2005, daughters are also considered as coparceners, having the same rights as sons. This means that they can demand partition, become the Karta, and also have a birthright in the ancestral property of the HUF. The coparceners’ share in the HUF keeps changing with the birth and death of the members. The existence of an HUF does not get affected by the death of the Karta. The senior-most coparcener becomes the Karta in the event of the death of the Karta. Thus, the HUF continues to exist over generations. It’s also important to note that an HUF cannot be created by a contract but by the status of a family i.e., it is created automatically at the time of marriage.

Taxation of HUF

The tax rates applicable to a Hindu Undivided Family (HUF) are the same as those applicable to an individual taxpayer. The tax rates are divided into two schemes: the old regime and the new regime.

Under the old regime, the tax rates for the financial year 2024-25 are as follows:

In addition to the above, a surcharge is levied if the total income exceeds certain limits. A 4% health and education cess is also applicable on the amount of tax computed, including surcharge.

Under the *new regime, which is optional, the tax rates are as follows:

*As revised by the union budget 2024

The new regime offers lower tax rates but does not allow for most deductions and exemptions available under the old regime.

As for the rebate under Section 87A, the deduction under Section 87A is not available to a Hindu Undivided Family (HUF). This rebate is designed only for individual taxpayers. Taxpayers such as non-resident individuals (NRIs), Hindu Undivided Family (HUF), and firms are not eligible for the rebate under Section 87A. Companies, firms, and HUFs are not eligible for this tax rebate. Therefore, an HUF cannot avail of this rebate.

Differences in Taxation Benefits

While many of the provisions that apply to individuals also apply to HUFs, there are certain differences. For instance, an HUF is entitled to claim deductions under section 80C, 80D, 80G, etc., of the Income Tax Act, 1961, separately from its members. This means that both the HUF and its members can claim tax benefits independently, potentially leading to significant tax savings.

Exemption of Profit Distribution

The distribution of profits by an HUF to its members is exempt from tax. This is because the income is already taxed in the hands of the HUF, and taxing it again upon distribution would amount to double taxation.

Section 10(2)- Subject to the provisions of sub-section (2) of section 64, any sum received by an individual as a member of a Hindu undivided family, where such sum has been paid out of the income of the family, or, in the case of any impartible estate, where such sum has been paid out of the income of the estate belonging to the family ;

Taxation of Gifts under Section 56

Under Section 56(2)(x) of the Income Tax Act, any gift received by an HUF from its members is not taxable. However, gifts received by an HUF from non-members exceeding Rs. 50,000 in a financial year are taxable.

Should an HUF be Created?

The decision to create an HUF should be carefully considered. While there are potential tax benefits, these must be weighed against the administrative complexities and potential for family disputes. An HUF requires a separate PAN, bank account, and bookkeeping, which can be burdensome.

Disadvantages of Creating an HUF

One of the main disadvantages of creating an HUF is the potential for disputes over the distribution of assets, especially as the family grows. The Karta (head of the family) has significant control over the assets of the HUF, which can lead to disagreements. Furthermore, once created, an HUF cannot be easily dissolved.

Conclusion

In conclusion, while an HUF can provide tax benefits, it also comes with potential drawbacks. It is essential to consider these factors and seek professional advice before deciding to create an HUF. The decision should be based on the specific circumstances and needs of the family.