- HUF is neither the creation of law nor of contract
- But HUF has not been defined under the Income Tax Act as it could be well derived under Hindu Law
- Tax is payable by every person, u/s 4 of the Income Tax Act, 1961
- The term ‘Person’ defined u/s 2(31)(ii) of the IT Act, 1961 includes a Hindu Undivided Family.
Elements of HUF
Hindu Undivided Family consists of a common ancestor and all his lineal descendants together with their wives and unmarried daughters.
How HUF can be formed
- Husband + Wife = HUF. But HUF income will not be assessed separately since the wife can become a member only, not a coparcener. Members have equal rights but cannot demand partition.
- Husband + Wife + Children = HUF which will be assessed separately in Income tax.
- HUF need not consist of two male members. E.g. HUF of father will continue after his death with the son as Karta.
- Blending of coparcener property into HUF Hotchpots with adequate consideration.
- Creation of HUF by inheritance by making WILL in favour of HUF.
- Creation of HUF by partition of larger HUF.
- A Gift specifically given to HUF can form HUF and Husband & wife can constitute HUF. Presence of a minimum of two male members is not mandatory. (The Supreme Court in Pushpa Devi v. CIT 109 ITR 730 (SC) has held that a HUF can accept gifts from a person who is not a coparcener) In C.N. Arunachala Mudaliar v. C.A. Muruganatha Mudaliar  SCR 243, it was held that the court would have to collect the intention of the donor in accordance with the well-known canons of construction
Process to form a HUF entity
- Create HUF Deed with element
- ● Formal documents on stamp paper
- ● Name of Karta and Coparcener
- ● Name of Members
- ● Name of HUF like Kalpesh Patel (HUF)
- ● Corpus/capital of HUF.
- Apply for PAN Card
- Open Bank Account in the name of HUF.
- File Income tax return of HUF.
Residential Status of HUF
- ★ Resident - When control and management of affairs of HUF are wholly or partly situated in India
- ★ Non Resident - When control and management of affairs of HUF are wholly outside India
Income Tax Return of HUF
- If income exceeds the basic exemption limit – required to file ITR
- HUF can earn various income same as individuals like
- ● Business income,
- ● Rent
- ● Agriculture income, interest income, dividend etc.
- ● Capital gain on sale of property
- ● Income should arise on the investment of HUF Funds.
- HUF cannot earn salary because salary is paid in individual capacity.
Expenses/Deductions under Income tax
- Reasonable and bonafide remuneration paid to Karta
- Reasonable and bonafide remuneration paid to Member
- Repayment of interest on residential loan
- Standard deduction of 30% against rental income
- Business expenses against business income
- HUF can take advantage of 44AD
- HUF can receive gifts from members exceeding Rs. 50,000/ without any liability to pay tax.
- Any sum received by coparcener from HUF is exempt u/s 10(2)
- Deductions under chapter VIA
- Insurance policy
- Medical treatment of dependent
- Donations to charitable institutions
- Deductions for saving a/c interest
Benefits of HUF Formation
- Taxpayers can save tax in legal manner.
- Enjoy benefit of basic exemption limit
- Deduction also available under Chapter VIA
- HUF can have a separate demat account
- HUF can invest in shares and Mutual funds.
- HUF can give loan to Members
- The sum received by a member on partition towards his share as coparcener is not taxable as income. [Smt. Sudha V. Iyer Vs ITO 15 Taxmann.com 234 (ITATMum)(2011)