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Granted the Status of an Independent Tax Entity

HUF has a Key Role in Personal Tax Planning

Under the Direct Tax Laws in our country, a Hindu Undivided Family (HUF) has been granted the status of an independent tax entity. Thus, an HUF has assumed a useful role in personal tax planning.

Dispelling Myths about an HUF

The term HUF has not been separately defined under the Direct Tax Laws and, therefore, this expression must be understood as defined under the Hindu Law. As per Hindu Law, an HUF is a family consisting of all lineal male descendants of a common ancestor and includes their wives and unmarried daughters.

No doubt, it is true that to constitute an HUF, there should be atleast two members and there cannot be an HUF consisting of a single member, male or female. However, the myth or misconception that there must be atleast two male members in the family to constitute an HUF as a taxable unit needs to be dispelled. It has been judicially well settled that the profit or income arising to an HUF cannot be taxed in the hands of the individual on the ground that he does not have a son in the family.

Augmenting Property for an HUF

The existence of an HUF is dependent on the principles of Hindu Law. Since HUF is a creature of law, the term ‘creation of HUF’ is a misnomer. It may quite often happen that an existing HUF may not own any property. In order to avail benefits of tax planning it is necessary for such an HUF to augment its own property. In fact the term colloquially used as ‘creation of HUF’ refers to ‘creating or augmenting funds for an existing HUF.’

The most popular mode for augmenting property in case of an HUF is by receiving gifts. In this context it must be borne in mind that if any member of the HUF gives a gift to his/her HUF, the income derived by the HUF from such gifted property is liable to be clubbed with the total income of the member. Similar provisions in regard to clubbing of wealth have also been provided. The clubbing provisions referred to above are applicable only in the case of gift by a member to his/her own HUF.

However, it is possible for an outsider, who is not a member of the HUF, to give a gift to the HUF declaring his/her express intention that such gift is to be held by the HUF. Such a gift can be accepted by the Karta on behalf of the HUF and the income arising out of such gifted funds will be treated as separate income of the HUF for tax purposes.

When such a gift is received by the HUF, the provisions of Section 56(2)(vii) need to be borne in mind. As per the said provisions, any gifts exceeding Rs.50,000 received in a financial year are treated as taxable income in the hands of the HUF.

Moreover, funds can also be augmented for an HUF by making appropriate provisions in favour of the HUF under a Will or settlement of a trust or through partition of a bigger HUF. In such cases, the provisions of Section 56(2)(vii) are not attracted and no liability to income-tax would arise.

Tax Benefits for HUF

As mentioned above, a Hindu Undivided Family is recognized as a separate assessable entity both under the Income-tax and Wealth-tax Acts. It would, therefore, be worthwhile to plan independent income and wealth for the HUF.

The income or wealth of an HUF is taxed separately in the hands of the HUF itself and no part thereof is subject to tax in the hands of any member of the family by virtue of Section 10(2) of the Income-tax Act and Section 5(1)(ii) of the Wealth-tax Act.

Since an HUF has been granted the status of an independent tax entity just like an individual, it would also enjoy the advantages of separate personal income-tax exemption limit of Rs.1,60,000 and graded tax structure up to the maximum income level of Rs.8,00,000 (effective from FY 2010-11), deductions from gross total income under Section 80 family of the Income-tax Act. Similarly, an HUF would also be entitled to a separate personal Wealth-tax exemption of Rs.30,00,000 (effective from AY 2010-11) and other benefits of exemption under Section 5 of the Wealth-tax Act.

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