Indian Laws on HUF Taxation

A Hindu Undivided Family (HUF) or a Joint Hindu Family is treated as a separate taxable entity under the provisions of sec. 2(31) of the Income Tax Act, 1961. This is in addition to an individual as a separate taxable entity. As per Indian laws, the same person can be assessed in two different capacities: as an individual and as a Karta or the leader of his HUF. The rates of income taxes for HUFs are the same as the ones applicable for individuals.

HUF and Its Features

A special feature of the Hindu Society, the Hindu Undivided Family consists of a common ancestor and all his lineal male descendants along with their wives and unmarried daughters. The term Hindu includes all persons who are Hindu by religion. As per the Section 2 of the Hindu Succession Act, 1956, the term Hindu is applicable to any person who is Hindu by religion in any of its forms or developments. This includes a Virashaiva, Lingayat or a follower of Brahmo, Prathana or Arya Samaj, a Buddhist, Jain or Sikh.

Taxation of HUF: Points to Remember

Here are some key points about HUF taxation:

• All income arising out of the utilization of HUF’s properties and from the investment of funds owned by an HUF is treated as the income of the HUF and separately assessed for tax purposes.
• Any personal income of a member of an HUF is regarded as the individual’s income and not that of the HUF.
• An HUF can contribute capital in a partnership firm and the share of profits arising from this investment will be regarded as the income of HUF and taxed accordingly in the hands of the Karta or the representative of the HUF.
• However, if the partnership firm gives a certain sum as salary to the Karta or manager for the services rendered by him to the HUF, such income is taxed in the hands of the Karta in his individual capacity.
• An HUF can earn income from several sources, such as from house property, profits from business, income from capital gains, and income from other sources.
• An HUF cannot earn income from salary since a salary is earned for the personal skills and services of an individual.
• An HUF can hold assets such as shares, securities, jewellery, and movable and immovable property. These assets can be acquired by an HUF by way of gift which is specifically instructed to be given to the HUF or it can receive assets on partition of a larger HUF of which its coparcener was a member and the same is treated as HUF property.

Tax Benefits of an HUF

The rule that income from sources such as income from house property or income from business or capital gains can be taxed separately in the hands of an HUF and is not clubbed with an individual’s income can be used for tax saving purposes. The division of income between two entities- the individual and the HUF can result in substantial savings. Indian laws also allow for the claim of expenses and deductions from the incomes of the individual as well as the HUF. An HUF can also be used as a tax planning device in case of partitions, re-unions of the partitioned families, family settlements, renunciations, releases by the existing HUFs, payment of salaries to Karta or members of the family.