India is diverse and unique in many ways. Many of the economic theories and business models fail to hold in India owing to the unique nature of the economy, the country and the citizens. India is deeply influenced by and believes in its traditions passed on from generations to generations. These traditions are not merely restricted to the family rituals, celebrations or occasions, but also the businesses in India. Like traditions, most middle and upper-class families pass on a business legacy to their children who carry on the venture ahead. Even today, many of the corporates in India are held and controlled by business families. Thus, the laws in India are also uniquely designed to cater to the same. One such unique concept is the Hindu Undivided Family (HUF).
Business entities have separate legal existence of which some emerge naturally i.e. humans while many emerge as a result of incorporation or by registration under any statue e.g. companies, partnerships, trusts, societies, etc. However, there is one entity type that has a separate existence, although not a human, and also does not emerge out of incorporation – Hindu Undivided Family (HUF). HUFs are a result of the custom or social practice of a particular community. In India, the law has never been aloof of the traditions pursued by the societies and thus, written laws always consider the practices and customs of the society and changes therein. Customary law is a branch that consists of customs that are accepted widely as legal requirements or rules of conduct. These customary laws later are so powerful that at some point in the timeline they acquire the force of law. HUF found its legal recognition in the late 19th century when the Income Tax Act in the pre-independence period gave it a status of a separate and distinct tax entity in 1922. The legal category of HUF has existed in our tax laws since then.
Hindu Undivided Family (HUF) is practically relevant for Indians. Most Indian families follow the practice of living today and also earning together through the common business source. Thus, the wealth accumulated as a result of the earnings does not belong singularly to any person, however, each family person has an equal right in it. However, the absence of any systematically written law on this topic has added to several confusions. Courts interpret prevailing social practices in the best possible way, however, the confusion remains and shall continue till a law is framed. Let us understand the various aspects of the Hindu Undivided Family (HUF) to the extent we know it, based on various juridical pronouncements.
Who can create a Hindu Undivided Family?
One person cannot form a HUF. A HUF is formed only by a family. People belonging to the Hindu, Buddhism, Jainism and Sikh community can form a HUF.
How is a Hindu Undivided Family created?
A HUF is automatically created at the time of marriage. A Hindu male along with his wife and children automatically constitute a HUF. HUF is a creation of Hindu Law. It cannot be created by action or registration except for marriage and adoption. An undivided family is a normal condition of the Hindu society which is ordinarily joint not merely in the estate but also in food and worship. Thus, the concept of joint family is a result of birth, and possession of the joint property is not necessary for its constitution.
The definition of HUF remains the same as in Hindu law, which defined Hindu Undivided Family (HUF) as consisting of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. The common ancestor is a must. The HUF is fluctuating and its size increases with the birth of a member in the family and decreases on the death of a member.
What can become the property of HUF?
Property in the hands of a HUF can emerge in the following ways:
- Ancestral property i.e. property inherited by a Hindu from paternal ancestors. Any property inherited from the maternal ancestor cannot be regarded as ancestral since one can not acquire the interest in it by birth.
- Joint property i.e. property acquired by members of the family earned by joint labour, however, mere acquisition in the name of all family members does not constitute family property.
- Property is thrown in common stock by way of gift by any member
- Any property acquired with the above joint funds
Who is Karta and what are his rights?
The head of the family is called Karta. The senior-most male member of the family automatically becomes the Karta. Karta has the right to manage the HUF property. A junior male member of the family can become the Karta if all co-parceners agree to the same. In simple words, Karta is the manager of a joint family and joint family properties. He takes care of day to day expenses of the family, looks after the family and protects the joint family properties. The relationship between Karta and members is neither of principal or agent nor like partners in a partnership firm. Further, he is neither a trustee and cannot be questioned about spending, unless charges of misappropriation are filed and proved by any co-parcener.
Following are some principle rights:
- absolute management powers to manage the family assets for the benefit of the family
- collect all income from its members, earned by the HUF through the HUF property, as the same belongs to the HUF
- right to represent the family in all matters whether legal, social or religious
- enter into any transaction on behalf of the family and his acts are binding on the family
- compromise any dispute against the family
- acknowledge the debt and to contract debt
- enter into contracts on behalf of the family
Besides rights, Karta also has some duties which are as follows:
- maintain members of the family by providing necessary resources to live
- render accounts of the property at the time of partition
- recover advances made on behalf of the family
- liability to spend reasonably
- liability to not start any new business without the consent of adult co-parceners
Who are Co-parceners and what are their rights?
Family members whether male or female who take birth in the family are co-parceners of the family. E.g. in the case of a HUF consisting of a Husband, wife, daughter and son, the Husband would become Karta while the daughter and son would become the co-parcener. All lineal descendants up to four generations from the common male ancestor become co-parcener by birth. The wife is only a member of the family and does not become a co-parcener in her husband’s HUF, however, would remain a co-parcener in her father’s HUF, even after marriage. Karta of the family is a co-parcener by default. Only co-parceners have the right to demand partition of the HUF. Members cannot demand the partition of HUF or claim in the property. They can claim their right to receive a share from the HUF property only through the coparceners.
What are the benefits of forming HUF?
The major advantage of creating a separate Hindu Undivided Family (HUF) entity is an extra PAN and splitting of the family income. This results in tax savings and reduces the tax outgo, without breaching any law. Besides, a HUF being a separate entity can avail loans on its own, invest in equity and even apply for an IPO, invest in life insurance and other investment tools except for small savings schemes such as provident fund and other post office schemes.
What are the drawbacks of forming a HUF?
One of the greatest disadvantages of forming a HUF is that all members have equal rights on the property and the common property cannot be sold without the consent of all the members. Thus, the income you earn through the HUF property remains with the HUF and all family members have an equal share in the property and can demand a partition. The number of family members increase and decrease with birth and deaths respectively. Sometimes, a HUF can become large and difficult to maintain the same. Family issues and divorce cases can lead to legal troubles and parting away a share in the HUF property. Besides, a HUF cannot be closed like a company or other incorporated bodies by filing forms. A partition of the family estate amongst its members by complete dissolution of the assets is the only way to close a HUF.
Can a Husband and wife constitute a Hindu Undivided Family?
Yes, it has been held in the case of Gowli Buddanna versus CIT that to constitute a joint Hindu family, it is not necessary to have more than one coparcener in the family. A husband and wife can validly constitute a Hindu undivided family. However, under income tax laws, an entity to be taxed as a HUF should have at least two co-parceners. For instance, if HUF consists of only the husband and wife, then there is only one coparcener. So it will not be taxed in the hands of HUF, instead of in the hands of the individual. The only exception to the above is in the case where the funds are received on the partition of a larger HUF.
Thus, a HUF can be formed by a husband (co-parcener) and wife (member), however, it can earn income separately for tax purposes only when there are two co-parceners i.e. when a child, whether male or female, becomes part of the family.
Can a woman become Karta of a HUF?
Yes, a woman can become the Karta of the HUF, if all co-parceners agree to do so. The Supreme Court in the case of Sujata Sharma versus Manu Gupta had ruled in 2016 in this regard. The senior-most male member of the family automatically becomes the Karta of the HUF, and on his death, the next senior-most male member. However, if all co-parceners expressly agree to make a particular co-parcener whether male or female to act as co-parcener, the same is also acceptable. It is advised that in such cases, an agreement or declaration on this behalf in writing be executed and registered.
It is important to note here that only females in the family who are co-parceners can become Karta. Therefore, a wife cannot become Karta of her Husband’s HUF, however, she can become a co-parcener in her father’s HUF. All daughters have the right to become Karta in the HUF of their father, however, the same must be expressly agreed by all co-parceners.
Should a HUF be a resident of India?
HUF can be formed only by Indian Hindus. However, the HUF does not need to remain a resident of India. In case the control and management of the HUF are situated outside India, the HUF would be a non-resident. In simple words, if the Karta is resident in India (living in India for 182 days or more during the year) and managing the joint property from India then the HUF is also Resident, otherwise, if the affairs of the HUF are managed by the Karta from outside India, the HUF would be a non-resident. The taxation of HUF is similar to the taxation of individuals.
Can members of the HUF (in personal income tax returns) and the HUF separately claim deductions under Section 80C?
Yes, the HUF being a separate taxable assessee, can claim a deduction under section 80C separately from its members. However, it is important to note that the member and the HUF cannot claim a deduction in respect of the same investment made or expense incurred in both returns.
What if a property is received by a male member from the partition of his father’s HUF, after his marriage but before a child is born?
There is no clear law or judicial pronouncement in this matter. One view is that such property is an ancestral and joint property of the son’s HUF, the other view is that since a second co-parcener is not yet born, the HUF cannot acquire ancestral property and the same must be taxed in the hands of the individual.
Can HUF receive gifts from anybody?
Yes, where a gift by a person with the intention that the money should be used for the benefit of the family, the same shall constitute HUF property. Such a gift can be received from anybody. There is no restriction for a HUF to accept gifts from any source. However, the intention of the donor should be clear and the gift should be genuine. The donee shall have to prove the identity and capacity of the donor as well as the genuineness of the gift. Friendship, relationship, closeness need to be established. However, gifts received from relatives shall not be taxable while gifts received from other people would be taxable under income tax, similar to the way the same is taxed in the case of individuals.
Is it necessary for the HUF to have ancestral property before receiving any income or gift from co-parceners?
No, the HUF does not need to have ancestral property, as the key essence is a common ancestor. A HUF can start empty-handed and earn income.
What is the concept of Sole Surviving Coparcener?
When a family is reduced to only one coparcener, such coparcener is called the Sole Surviving Coparcener. For purposes of tax assessment, the sole surviving coparcener is assessed in the status of a HUF, and his powers are wide and unrestricted and similar to an individual. He can alienate the property in whatever manner he likes.
Can partitions be conducted orally?
Yes, no law mandates partitions to be written or registered. It is not necessary to effect partition by a written deed. It can be effected orally and be acted upon. Even a partition of immovable property can be by an oral agreement. However, for taxation and as for legal prudence, it is recommended that the partition is in writing.