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Assessment of Hindu Undivided Family

Assessment of Hindu Undivided Family. By Team Professional Times. What is an HUF. Hindu Undivided Family (HUF)or a Joint Hindu Family Consists of : Any married Hindu, Sikh, Jain or Buddhist man can form HUF

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Assessment of Hindu Undivided Family

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  1. Assessment of Hindu Undivided Family By Team Professional Times

  2. What is an HUF • Hindu Undivided Family (HUF)or a Joint Hindu Family • Consists of : • Any married Hindu, Sikh, Jain or Buddhist man can form HUF • HUF is automatically constituted on marriage. Few simple formalities to complete for HUF to function as legal entity • Formed from blending of individual property with HUF character, Gifts, Joint Labour, Will, Partition or Reunion

  3. Salient Features of HUF CO-PARCENERS:- • Some of the members of HUF are designated as co-parceners. • All coparcenersare members of HUF, all membersare NOT co-parceners. • Husband & Wife form HUF, wife can only be member, NOT co-parcener. • Co-parcener is different from the other members of HUF, coparceners are those members who acquires by birth an interest in the joint property of the family. • Co parcenary is restricted to four levels of living order. • Daughters also coparcener w.e.f. 9.9.2005 in the Hindu Succession (Amendment)Act, 2005. • After Hindu Succession Act amendments equal rights to daughters even after marriage. • Married women have rights in two HUFs-their father's as co-parcener and their husband's as member. • There's no need to fill an application form or submit KYCdocuments for joining an HUF. • Members if the family who are not co-parceners- No right to claim partition. • 1st Step Form a corpus for HUF, can be any CAPITAL ASSET(like property, gold, jewellery, securities, deposits) or CASH.

  4. Hindu Succession (Amendment Act), 2005 (Position on or after 9.9.2005) • Daughter of a coparcener shall by birth become coparcenerin her own right in the same manner as son. • Daughter has the same rights in the coparcener property as she would have had if she had been a son. • Daughter is allotted the same share as to the son.

  5. Who can be a KARTA of HUF • The FATHER of the family in absence, senior male member of the family. • Can a female be the Karta? • Unmarried daughter, in the unfortunate event of her father passing away, will become Karta IF All male members are minors & natural guardian is mother then she is the Karta. • Can there be an all-female HUF? • Yes, Where a couple has only one daughter and the husband passes away, the mother-daughter duo can continue the HUF (although a problem may arise after she gets married and becomes a member of her husband's HUF).

  6. Duties of the Karta • Managing the affairs of HUF. • Maintaining the books of accounts, filing tax returns for HUF. • To enter in to contracts, form partnership firm, or representation on behalf of HUF.

  7. Schools of Hindu Law

  8. Residential Status of an HUF If A and B Both Satisfied= Ordinarily Resident If any of A or B Not Satisfied = Not Ordinarily Resident

  9. TaxationAspect • HUF is separate and distinct tax identity. • Five basic heads of income -Salary, House Property, Capital Gains, Profit from business, and Income from other sources. Except for salary, HUF can earn from all of these sources. • It can invest the initial corpus as well as the gifts received in subsequent years to earn • capital gains • Property can be let out to earn rental income • Business can be started to earn profit from it. • Interest and royalty incomes are categorized as other sources. • Various provisions under the Income Tax Act such as Advance tax, TDS, penalty, interest, fine, etc. are also applicable to HUF as in the case of an Individual Assessee.

  10. HUF and Income Tax Act • Sec 2(31)- Person as defined includes a Hindu Undivided Family • Sec 10(2)- Sum received by a member from the income of HUF • Sec 64(2)- Conversion of self acquired property into joint family property. • Sec 80C to 80JJA- Deduction from gross total income. • Sec 171- Assessment after Partition.

  11. Tax Saving through HUF • Separate exemption limitunder Income-tax Act of Rs. 2,00,000 • Separate deduction u/s 80G.(Donation) • Separate deduction u/s 80C.(Insurance Premium can be paid on life on any member upto Rs. 1 lacs) • Separate deduction u/s 80D.(Medi- Claim) (Rs.15000) • Section 80DD deduction for maintenance including medical treatment of a dependant who is a HUF member. • Salary to Karta /Member, • Separate Income-tax Deduction on Interest on loan for self occupied House Property in the name of HUF.(Sec 24(b))

  12. Wealth-Tax & HUF • Separate exemption of Wealth-tax for HUF’s upto Rs. 30 lakhs Wealth. • One House- Wealth Tax Free • Productive assets of HUF fully exempt from Wealth-tax

  13. Capital Gain Exemption Benefitsfor HUF • Cost Inflation Index benefit available to Calculate Cost of the Asset. • Tax benefit of 20% Tax on Long-term Capital Gains.(Except for non listed shares-Without STT) • Saving Tax on Long-term Capital Gain possible by investing in Capital Gains Bonds of NHAI / REC. • Long-term Capital Gains Saving by investing in Residential Property. • No capital gains to HUF on Distribution of assets on partition.

  14. Stock Market, Mutual Funds & HUF • HUF can have a separate DematAccount. • Make money by investing in shares of companies :- (a)Primary Market (b)Secondary Market • Enjoy Tax Free Income for Long-term Capital Gains by holding shares for more than one year(STT Paid). • HUF has 2 benefits in investing in IPOs’i.e. the 2 lakhs limit for the investment to be categorized as retail is not breached and there is a greater probability of more shares being allotted. • Enjoy lower tax rate of 15% on Short-term Capital Gains(STT Paid). • HUF can also invest in Mutual Fund.

  15. HUF as Proprietor of Business • HUF can be a Proprietorof one or more than one Business concerns. • Separate name can be kept of HUF business entity. • No tax Audit of HUF business if Turnoverwithin Rs.1 crores.(AY-2012-13) • Business Income Computation @ 8% without books of account in case turnover is upto Rs. 1Crores – The Presumptive Basis(AY 2012-13)

  16. Real Estate in the name of HUF • 30% Standard Deduction on Annual value of house property (Rental Income) to HUF u/s 24(a). • Self occupied one Residential House & the tax gain specially by way of Interest on Loan & Repayment of Loan u/s 24(b). • Exemption from Wealth-tax on 1 Residential housein the name of HUF.

  17. Tax exempt- Income received from HUF by the member of HUF • As per section 10(2) of the Income-tax Act, 1961 any sum received by an individual from Hindu Undivided Family of which he is member is exempt from tax. • Amount received not as a member of Joint Family but in pursuance of some statutory provision, etc. would not be exempted in this clause. • Member of joint family living apart from the other members does not effect his/her position in law toclaim the right as per section 10(2).

  18. Taxation of money received by HUF without consideration • Provisions of section 56(2)(vi)applicable even to HUF if any sum of money is received by the HUF exceeding Rs. 50,000 p.a. • Items received in kind subjected to the provisions of sec. 56(2)(vi).

  19. Gift of HUF Property • Elementary proposition that Karta of HUF cannot gift or alienate property except to the extent recognized under the Hindu Law, namely necessity etc – CGT v. P.Hanumanthappa 68 ITR 363, K.P. Gupta v. CIT 233 ITR 456 • Reasonable limits depends upon facts - CGT v. B.V. Narasimharaju 101 ITR 74 • Karta can make reasonable gifts to daughters – Sushil Kumar & Sons v. ITO 234 ITR 98 • Gift on Marriage Occasion is valid – S. Lakshmamma v. Kotayya AIR 1936 Mad. 825. • Gift of immovable property should be for pious purpose – CIT v. Ram Gopal Rajgharia 123 ITR 693 • Gift to Strangers void – Guramma v. Mallappa AIR 1964 SC 510.

  20. Gift by a member of HUF As per section 64(2) a gift by a member of a Hindu Undivided Family after 31-12-1969 would attract Clubbing of Income in the hands of the member and as such the income from the converted property shall be deemed to arise to the individual & not to the family.

  21. HowHUF cuts taxes Total Saving= -1, 37,505 ((54,590+54,590)-2,46,685) By setting up an HUF an individual can divide his taxable income between two separate income tax entities, this decreases his net taxable income as HUF gets 80C, 80CCF, 80D deduction separately and the basic exemption and cuts his annual tax payment by Rs. 1,37,505.

  22. Partition of the HUF …….Hindu Undivided family • Only co-parceners can demand partition • Two Types:

  23. Tax Implications of Partial Partition • As per section 171(9) of the Income-tax Act, 1961 the Partial Partition after 31-12-1978 is not recognized. • Even after Partial Partition the income of the HUF shall be liable to be assessed under the Income-tax Act as if no Partial Partition had taken place.

  24. TaxImplications of Full Partition • As per sec. 171(9) of the Income-tax Act, 1961 partition means: • where the property admits of a physical division:- • a physical division of the property, • physical division of the income without physical division of property shall NOT be deemed to be a partition; OR • where the property does not admit of a physical division:- then such division as the property admits of, but a mere severance of status shall not be deemed to be a partition.

  25. Procedure to effect partition • Under the Hindu law HUF may be ended by portioning the property (or what ever assets) of the HUF, but for IT purposes is to be recognized by the AO. • Share in assets of HUF: • All coparceners • mother(in case of death of father) • wife gets a share separate from husband in case of partition between her husband and sons • son in wombof mother at time of partition • At the time of making assessment u/s 143, 144, its claimed by any member that the partition has taken place AO shall make inquiry after giving notice. • After inquiry AO shall record finding as to • whether there has been TOTAL PARTITION • DATE of such partition.

  26. Order u/s 171 passed by AO • Where partition took place in the previous year is recorded by AO: • Income of HUF before partition shall be assessed as no partition has taken place. • Each member shall be liable separately and jointly for the income tax thereon • For this section several liability of any member or group of member shall be computed according to portion of joint family property allotted to him or it at partition. • The provisions are applicable in levy and collection of any penalty, interest fine or any sum for period upto partition date • Total partitionin the context of the I. T Actmeans partition by "Metes and Bounds”. • The Income Tax law will recognize its demise (for want of a better word, since a divided Hindu family can be reunited again),only when the HUF each and every layer of the clothing of property-tangible or intangible, movable or immovable -it had has been removed

  27. Share of allotment on partition:

  28. Judicial Decisions Relating to Hindu Undivided Family • Son is not necessary to constitute HUF under Mitakshara law - Gowali Buddanna v. CIT (1966) 60 ITR 293 (SC). • HUF with husband and wife only - Prem Kumar v. CIT 121 ITR 347 (Allahabad H.C.). • Remuneration to Karta of HUF can be followed -J. K. Baldeo Sahai v. CIT 63 ITR 238 (SC). • In order to be acceptable or recognizable partition under section 171 the partition should be complete with respect to all members of HUF and in respect of all properties of HUF and there should be actual division of property as per specified shares allotted to each member. – Mohanlal K. Shah (HUF) v. ITO 1 SOT 316. • Setting apart certain assets of HUF in favour of certain coparceners on the condition that no further claim in properties will be made by them is nothing but a partial partition and not a family arrangement not recognized in view of s. 171(9) – ITO v. P. Shankaraiah Yadav 91 ITD 228. • Property purchased with the aid of joint family funds, howsoever small that may be, still the property would be HUF income and cannot be income of the individual with major portion of purchase price – S. Periannan v. CIT 191 ITR 278.

  29. Gift From HUF Not Taxable u/s 56(2)(v) VineetkumarRaghavjibhaiBhalodia vs. ITO (ITAT Rajkot) HUF is a “relative” for gifts exemption u/s 56(2)(v), (vi) & (vii) The assessee received a gift of Rs.60 lakhs from his HUF. The AO & CIT(A) held that as HUF was not covered by the definition of “relative”, the gift was chargeable to tax u/s 56(2)(v). The alternate submission that gift was exempt u/s 10(2) was rejected on the basis that s. 10(2) applied only to amounts received “out of income of the estate” on partial or total partition of the HUF. On appeal by the assessee, HELD allowing the appeal: • (i) S. 56(2)(v) exempts gifts from a “relative”. Though the definition of the term “relative” does not specifically include a Hindu Undivided Family, a „HUF” constitutes all persons lineally descended from a common ancestor and includes their mothers, wives or widows and unmarried daughters. As all these persons fall in the definition of “relative”, an HUF is „a group of relatives‟. As a gift from a “relative” is exempt, a gift from a „group of relatives‟ is also exempt since the singular will include the plural; • (ii) The gift was also exempt u/s 10(2) because the two conditions required to be satisfied for relief viz (1) that the assessee is a member of the HUF and (2) that he receives the sum out of the income of such HUF (may be of an earlier Year) were satisfied.

  30. Smart strategies: Advantages of HUF • Helps avoid service tax :If business turnover is split by setting up HUF, the service provider can avoid the hassle of charging service tax and become small scale service provider. • Salary to Karta :This salary is taxed as his income and will be fully deductible from the HUF income. • Use HUF income for expenses :The income earned by the HUF can be used for the household expenses of the family. • Distribute income to co-parceners :Karta can gift money to the coparceners from the income earned by the HUF. This income is tax-free in the hands of the co-parceners. This way, person with a high income will be able to get tax-free income. • Give loan for business :HUF can give loans to the karta or coparceners for setting up business & can charge interest on the loan. Interest paid on any business loan is fully deductible. • No MAT or AMT :unlike other corporate entities, no minimum alternative tax on HUF owned businesses. • Small-scale industry exemption :or the business community, various exemptions and incentives given to small-scale units are crucial to ensuring healthy margins.

  31. Ways HUFs can be made better In May 2005, the government passed a rule PREVENTING HUFs from opening newaccounts in the Public Provident Fund. All existing accounts, which had completed 15 years since the initial deposit, were also to be closed by 31 March 2011. HUF CANNOT invest in other government securities such as the National Savings Certificates, as well. These restrictions should be done away with. Why should HUFs be treated differently from any other taxpayer? If the Karta of the HUF is crucial for its smooth functioning, the HUF should be allowed to take a Keyman life insurancecover for him and should be made the nominee. Hindu Succession Act accords equal rights to female co-parceners of an HUF, its only applicable to the Mitakshara school, it should be applicable to Dayabhaga school(West Bengal and Assam) as well. Keraladoes not haveaHUFsystem. For the sake of uniformity, the same rules should apply across the country. HUFs arenot eligible for some tax benefitsenjoyed by individual taxpayers. They should also be able to claim deduction for interest paid on education loans, benefits for pension fund contributions.

  32. Thank You

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