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FAQ: Hindu Undivided Family (26)

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What is a Hindu Undivided Family (HUF) according to the Income-tax Act 1961?

A Hindu Undivided Family (HUF) is considered a ‘person’ under section 2(31) of the Income-tax Act, 1961. It stands as a separate entity for the purpose of assessment under the Act. An HUF comprises all persons lineally descended from a common ancestor, including their wives and unmarried daughters. It’s noteworthy that an HUF is not formed through a contract; it is automatically established within a Hindu family.

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Can capital gain tax be saved if the members of a HUF transfer assets to the HUF?

Due to clubbing provisions under Section 64, there is no benefit of saving capital gains tax. The original owner of the assets will have to pay tax when the transferred assets are sold.

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Can HUF be added as an owner of a property to save tax on rental income?

Tax is paid by the entities who put up capital to acquire the property. Therefore it is considered tax evasion to transfer the rental income to the HUF to save tax.

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Can HUF invest in ELSS mutual funds to save tax?

An HUF is eligible to save tax under Section 80C via investments like ELSS, PPF and 5-year tax-saver FD.

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Can HUF invest in NPS to save tax?

An HUF is not allowed to invest in NPS and therefore there is no question of saving tax via investment in NPS.

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Can HUF invest in PPF?

A HUF can invest in PPF and get full 80C tax benefits. Since PPF is exempt from all tax (EEE mode), then there is never any tax on PPF.

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Can Karta receive salary from the HUF for running the HUF?

HUF can give salary to the Karta for running the HUF within reasonable limits. This amount will get added to the existing income, if any, of the Karta so that there is no special benefit. Coparceners cannot receive salary.

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Can tax on dividends saved by gifting shares to the HUF?

Under Section 64(2) of the income tax act, income from gifted assets like dividends from stocks will be clubbed with the income of the person making the gift. There is no wealth tax to be paid by the HUF at the time of gifting if the gift comes from HUF members or from relatives of HUF members.

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Can tax on interest saved by making FD in the name of the HUF?

Under Section 64(2) of the income tax act, income from gifted assets like interest from FD will be clubbed with the income of the person making the gift. There is no wealth tax to be paid by the HUF at the time of gifting if the gift comes from HUF members or from relatives of HUF members.

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Can tax on rent saved by gifting property to the HUF?

Under Section 64(2) of the income tax act, income from gifted assets like rent from property will be clubbed with the income of the person making the gift. There is no wealth tax to be paid by the HUF at the time of gifting if the gift comes from HUF members or from relatives of HUF members.

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How is assessment conducted after HUF partition under Section 171?

Once a joint family income is assessed as HUF income, it continues until coparceners claim partition before the relevant assessment year. An inquiry is conducted by the Assessing Officer after receiving the claim, determining the partition’s existence and date. Income until the partition date is assessed as HUF income; post-partition, it’s taxed as individual income. If a recipient forms another HUF, the income from partitioned property is charged to the new HUF.

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How is the assessment of HUF conducted under the Income-tax Act?

An HUF is recognized as a distinct assessable entity under the Act. For its income to be assessed, two conditions must be met: Firstly, there needs to be coparcenership within the family. Once an HUF’s income is initially assessed, it continues to be evaluated as such until partition is claimed by coparceners. Secondly, there should be joint family property, including ancestral property, property acquired using ancestral property, and property transferred by its members.

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How is the income treated if a member receives fees or remuneration in a company or firm where HUF funds are invested?

If the fees or remuneration is earned due to the investment of HUF funds, it may be treated as income of the HUF. However, if it’s earned for personal services rendered by the member, it’s considered the member’s personal income.

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How is the taxability of HUF determined?

To calculate the income of an HUF, one needs to ascertain its income under various heads, excluding incomes exempted under specific sections of the Income-tax Act (sections 10 to 13A). It’s important to consider these aspects while computing the income of the HUF.

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How to save tax by creating HUF?

HUF is separate from its members from the concept of taxability. Therefore deductions like 80C (PPF, ELSS mutual funds etc.) are applicable to HUF to save tax.

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Is an HUF eligible for deductions while calculating its taxable income?

Yes, an HUF is entitled to deductions available under Chapter VI-A, as applicable, when computing its taxable income.

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Is remuneration paid by the HUF to the karta or any other member deductible from the HUF's income?

Yes, remuneration paid by the HUF to the karta or any member is deductible if it meets certain criteria, like genuineness, reasonability, and is paid under a valid agreement.

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Is there any tax if the karta or members of the HUF gift any assets to the HUF?

Under Section 56(2)(x) of the Income tax act, members of the HUF are its relatives. So, there is no tax if the karta or the members (coparceners) gift any assets, like property, shares or mutual funds to the HUF with or without any adequate consideration. However, under Section 64(2) of the income tax act, income from such assets like dividends or interest will be clubbed with the income of the person making the gift.

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What's the effect of partial partition (Section 171(9))?

The effect of partial partition (Section 171(9)) is as follows:

  • After December 31, 1978, partial partitions aren’t recognized under the Act if assessed previously as an HUF.
  • If the conditions apply, the family continues to be assessed as if no partial partition occurred.
  • All members before the partition are jointly liable for any tax or penalties owed by the HUF, according to their allotted share.
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What are Total and Partial partitions under HUF?

Total Partition: The entire joint family property is divided, terminating the family as an HUF.

Partial Partition: It can be regarding persons constituting the family or properties held. Coparceners may separate partially while others remain joint. Property can be partially divided while retaining joint family status.

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What factors should one consider when computing the income of an HUF?

The income of an HUF is computed considering various heads of income, excluding exemptions under sections 10 to 13A of the Income Tax Act. Investment of HUF funds in companies or firms and remuneration received by a member, among other factors, influence the computation.

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What incomes are not taxed as the income of an HUF?

Several incomes are not taxed as the income of an HUF, including self-acquired property converted into joint family property, income from impartible estates, personal incomes of members, Stridhan (a woman’s absolute property), and income from individual property of a daughter.

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What is considered as Ancestral Property under HUF taxation?

Ancestral property is defined as the property inherited from any of the three immediate male ancestors: father, grandfather, or great-grandfather. Any property inherited from a relation other than these immediate ancestors isn’t considered ancestral property. The income from such ancestral property held by certain family setups like a family of widow mother and sons, a family of husband and wife with no child, among others, is taxable as the income of the HUF.

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What is Partition of HUF and who is entitled to a share?

Partition signifies property division. It can occur physically or, when not feasible, as the property allows. While coparceners can claim partition, other entitled persons include a son in the womb during partition, the mother, and others as mentioned in the Act.

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What is the tax rate applicable to an HUF?

An HUF is taxed at the same slab rates applicable to an individual. Additionally, an HUF might be liable to pay Alternate Minimum Tax under certain conditions if the tax payable is less than 18.5 percent of the Adjusted Total Income, including cess and surcharge.

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Who does an HUF consist of under Hindu Law?

According to Hindu Law, an HUF constitutes a family comprising all descendants from a common male ancestor along with their wives and unmarried daughters. This concept extends to Jain and Sikh families under the Act, despite not being governed by Hindu Law.

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