Creation and Taxability – Hindu Undivided Family (HUF)

‘Hindu Undivided Family’ (HUF) is a family that consists of all persons lineally descended from a common ancestor, including wives and unmarried daughters. A HUF consists of a Karta and Coparceners. The karta has to be the oldest male in the family and after he passes away his eldest son will take his place and if he chooses not to, he can give up his right and the next son in line can take his place. All the other male members are referred to as Coparceners and the female members are simply called members.

HUF is a creature of law. It cannot be “created” by act of parties. So, membership into a HUF does not come from a contract but from your status.

HUF can be used as a means of effective tax planning and it has too much importance due to tax benefits associated with the income tax

Under the Income Tax Act, 1961, HUF is treated as a separate entity for the purpose of assessment and HUF has an identity as an artificial person which is managed and controlled by its Karta & other Coparcener.

HUF can earn income from all the heads of income except income from salary and all income that arises on the investment of the HUF’s funds and utilisation of its assets is regarded as income and is separately assessed and taxed. Moreover, the income of the HUF is eligible to the same slabs and basic exemption limit as available to an individual that means the income earned by such HUF will enjoy all exemptions and deductions including the basic exemption from income-tax.

Thus, if an individual has HUF and have personal income as well as HUF income, he would be entitled to have basic exemption for his individual income and another basic exemption for his HUF income. In addition to that, he would also be eligible to a further income tax deduction or exemption both on individual and HUF income separately. But, an individual can claim two basic exemptions only if he files both individual and HUF returns.

Moreover, any income received by an individual as a member of the HUF out of the income of the family or out of the income of the estate of the family, is not taxable and exempt u/s 10(2) of the act.

The bank account of the HUF should be in the name of either the HUF or in the name of the Karta by specifically declaring that the account is that of the HUF only and only the funds belonging to the HUF should be deposited in such an account.

Gift received by HUF

As HUF is an artificial person and neither its members nor other persons, can be a relative of HUF.  So, gift received in excess of Rs. 50,000 from karta and other members are taxable in the hands of HUF under the head “Income from other sources”.

Loan by or to HUF

In the eyes of Law both HUF and its members are separate as HUF is separate entity. Hence HUF can accept or give loan from its members or to the members irrespective of interest.

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