The term ‘Hindu undivided family’ is defined under the Hindu law. The term refers to a family of all persons lineally descended from common ancestors, including wives and unmarried daughters, if any, living together and owning property through ancestors. It is a joint family with many generations living together. So, HUF (Hindu undivided family) basically is a family consisting of persons who are the lineal descendants of a common ancestor, means the hereditary chain of the members is a must. Therefore, for an HUF to exist, lineal descendants with a common ancestor are a must. There are several laws in existence which govern the property ownership, marriages, and taxation etc. for a legally declared Hindu Undivided Family. HUF is neither the creation of law nor any contract; it arises from the status of a person.
HUF may be a composition of:
a. Large families
b. Small families
c. Nuclear joint families.
It will be interesting to know that Jains, Buddhists and Sikh families which are not governed by the Hindu law, can also be treated as Hindu undivided family for the sake of Income Tax Act.
INCOME AND TAXATION CONCEPT
The income generated in a HUF does not belong to any specific individual but to the whole family. The income generated is taxed in the hands of the HUF and not in the hands of a family. For the purpose of Income Tax Act, HUF is considered to be a separate legal entity. HUF has a separate PAN Card and separate income tax return is filed. The marriage of a person leads to the formation of a Hindu undivided family. The day when the boy gets married and starts his family, the HUF comes into existence. However, it can also be created at any point of time in future. It is often suggested to have written agreement as the banks and income tax department ask for an HUF deed.
Judgement of case: Surjit Lal Chhabda v. C.I.T.
“Even in the absence of an antecedent history of jointness, the appellant could constitute a joint Hindu Family with his wife and unmarried daughter. True that the appellant could not constitute a Coparcenary with his wife and unmarried daughter but under the Income Tax Act a Hindu undivided family, not a Coparcenary is taxable unit. A Hindu Coparcenary is a much narrower body than the joint family. Since the personal law of the appellant regards him as the owner of Kathoke lodge and the income there from as his income even after the property was thrown into the family hotchpotch, the income would be chargeable to income tax as his individual income and not that of the family. Hence, the appeal was dismissed.”
There are two methods of saving tax- legal and non-legal. Non legal methods are basically the methods of tax evasion which is illegal in India. But formation of a HUF is the very effective and legal way to save tax.
U/s 4 of the Income Tax Act, 1961, Income-tax is payable by ‘every person’. ‘Person’ includes a ‘Hindu Undivided Family’ as defined in sec. 2(31). The definition of ‘Hindu Undivided Family’ is not found in the Income-tax Act. Therefore the expression ‘Hindu Undivided Family’ must be construed in the sense in which it is understood under the ‘Hindu Law’ [Surjit Lal Chhabda vs. CIT 101 ITR 776(SC)].CREATION OF HUF 3 major steps required:
- Create HUF deed;
- Apply for HUF PAN card;
- Open bank account of HUF.
HUF deed is basically a formal written agreement on a stamp paper that states the names of the karta and co-psarceners in an HUF. Along with details of the members, it also contains the details of business of HUF. Karta is the eldest male member of the family. On the death of the karta, the next eldest son becomes the karta. Coparceners acquire rights in the HUF by birth although the HUF consists of both males and females, Only the male members can be the coparceners. Every member of family is not a coparcener but all the coparceners are the members of a family. Only the coparcener can ask for partition of the family property.
1. C. Krishna Prasad vs. CIT97 ITR 493]
A single person, male or female, cannot constitute a Hindu Undivided Family. An individual, who has obtained a share on partition of a joint family, has potentialities of creating a joint family; but until he marries, he alone cannot be considered as a joint family.
In case of Darshan vs. Prabhu ILR (1946) All 692, it is held that there can be more than one Karta of HUF.
Every member provides a declaration whereby they provide name of the karta and also state that the members are only the members of HUF, karta has the authority of the accounts vested in his hands, and that the karta also holds the right to govern all transactions of HUF accounts on behalf of the members of HUF. Name of HUF is usually in the name of the karta, for example, the name of karta is shyam then name of HUF will be shyam HUF.
Pan card is very crucial document for HUF as it establishes the HUF as a financial entity which can open bank accounts, buy property, and make investment among other things.
HUF can claim deductions under section 80 and other exemptions in its income tax returns. It is also eligible for insurance policy for life of its members. The salary; paid to the members of the HUF who are contributing to the joint family business if any, can be deducted from income of HUF. Any returns from the income of HUF are taxable in the hands of HUF. The rate for taxation for HUF is similar as that for an individual.