Under Hindu Law, a Hindu Undivided Family (HUF) is a family which consists of all persons lineally descended from a common ancestor, and also the wives and daughters of the male descendants. It consists of the Karta, who is typically the eldest person or head of the family, while other family members are coparceners. The Karta manages the day-to-day affairs of the HUF. Children are coparceners of their father’s HUF.
How is a HUF covered under Income Tax Provisions?
Under section 2(31) of the Income-tax Act, 1961, an HUF is considered a “person” and, therefore, is treated as a separate entity for the purpose of tax assessment.
How is the income of a HUF taxed?
In order to compute the income of an HUF, one has to first ascertain its income under the different heads of income (ignoring incomes exempted under sections 10 to 13A of the Act). The following points should be kept in mind while computing income:
- If funds of an HUF are invested in a company or a firm, fees or remuneration received by the member as a director or a partner in the company or firm may be treated as income of the family (if fees or remuneration is earned essentially as a result of investment of funds).
- However, if fees or remuneration is earned for services rendered by the member in his personal capacity, it will be treated as the personal income of the member.
- If any remuneration is paid by the HUF to the karta or any other member for services rendered by him, remuneration is deductible from income of HUF if such payment is genuine and not excessive and paid under a valid and bona fide agreement.
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The following incomes are not taxed as income of 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.
A HUF is taxed separately from its members, therefore, deductions (such as under Section 80) or exemptions allowed under the tax laws can be claimed by it separately. For example, if you and your spouse along with your 2 children decide to create a HUF, all 4 of you as well as the HUF can claim a deduction for Section 80C. HUF is usually used by families as a means to build assets.