HIDAYATULLAH NATIONAL LAW UNIVERSITY, UPARWARA, NEW RAIPUR

LAWS OF TAXATION PROJECT

ON

CONCEPT OF HINDU UNDIVIDED FAMILY AS TAXABLE ENTITY AND ITS

TAX TREATMENT WITH SPECIAL REFERENCE TO ITS RESIDENTIAL
STATUS

SUBMITTED TO SUBMITTED BY

MR. RANA NAVNEET ROY SAKSHI DHRUW

SEMESTER V
SECTION A
ROLL. NO. 136

SUBMITTED ON
21/08/2017
 Concept of Hindu Undivided Family as taxable entity and its tax
treatment with special reference to its residential status

DECLARATION

I, Sakshi Dhruw, hereby declare that, the project work entitled, ‘Concept of Hindu Undivided
Family as taxable entity and its tax treatment with special reference to its residential status’
submitted to H.N.L.U., Raipur is record of an original work done by me under the able
guidance of Mr. Rana Navneet Roy, Faculty Member, H.N.L.U., Raipur.

Sakshi Dhruw

B.A. LLB (H)

Semester V ’A’

Roll no. 136

Page | 2
 Concept of Hindu Undivided Family as taxable entity and its tax
treatment with special reference to its residential status

ACKNOWLEDGEMENTS

I would like to sincerely thank the Taxation Teacher Mr. Rana Navneet Roy for giving me
this project which has widened my knowledge on the scope and relevance of it in present
time. His guidance and support has been instrumental in the completion of this project. Thank
you Sir.

I’d also like to thank all the authors, writers, columnists and social thinkers whose ideas and
works have been made use of in the completion of this project.

My heartfelt gratitude also goes out to the staff and administration of HNLU for the
infrastructure in the form of our library and IT lab that was a source of great help in the
completion of this project.

I also thank my friends for their precious inputs which have been very helpful in the
completion of this project.

Page | 3
 Concept of Hindu Undivided Family as taxable entity and its tax
treatment with special reference to its residential status

TABLE OF CONTENTS

I) DECLARATION..........................................................................................................2

II) ACKNOWLEDGEMENTS............................................................................................3

III) LIST OF CASES................................................................................................5

IV) INTRODUCTION........................................................................................................6

V) OBJECTIVES.............................................................................................................7

VI) RESEARCH METHODOLOGY....................................................................................7

VII) HINDU UNDIVIDED FAMILY................................................................................8

VIII) HINDU UNDIVIDED FAMILY AS A TAXABLE ENTITY............................................9

IX) RESIDENTIAL STATUS OF HINDU UNDIVIDED FAMILY........................................16

X) HINDU UNDIVIDED FAMILY AS A TAX SAVING TOOL............................................18

XI) CONCLUSION..........................................................................................................20

XII) BIBLIOGRAPHY......................................................................................................21

Page | 4
 Concept of Hindu Undivided Family as taxable entity and its tax
treatment with special reference to its residential status

LIST OF CASES

 CIT v. Ashok Bhai Chiman Bhai (1965) 56, ITR, 42 (S.C.).

 CIT v. Prakash Chand Agarwal [1982] 11 Taxman 55 (MP).
 Gowli Buddanna v. C.I.T. (1966) 60, ITR, p. 293 (S.C.)
 Jugal Kishore Baldeo Sahai v. CIT [1967] 63 ITR 238 (SC).
 Kalyanji Vithal Das v. CIT (1937) 5 ITR 90 (PC)].
 Raj Kumar Singh Hukam Chandji v. CIT (1970) 78 ITR 33.
 Y.L. Aggarwalla and others v. Commissioner of Income-tax (1978, 114 ITR 471).

Page | 5
 Concept of Hindu Undivided Family as taxable entity and its tax
treatment with special reference to its residential status

INTRODUCTION

According to Hindu Law, ‘Hindu Undivided Family’ is a family which consists of all persons
lineally descended from a common ancestor and includes their wives and unmarried
daughters. A ‘Hindu Undivided Family’ is neither the creation of law nor of a contract but
arises from status. HUF may be composed of Large Families; or Small Families; or Nuclear
Joint Families .It is a joint family system, where members of one family lived together in a
common house , including married brothers, their children and grandchildren, sometimes
even extending to five generations, continues even today in most Hindu families. Under the
joint family system, the members share houses, properties, business, income, wealth, food
and their value systems and principles.so, A joint Hindu family is given a separate legal
entity status called ‘Hindu Undivided Family’ (HUF) in india and this status is shared and
enjoyed by all members of the family.

In common parlance every tax payer is an assessee. The word assessee is defined in Section
2(7) of the Income Tax Act, 19611, according to which assessee means a person by whom
any tax or any other sum of money is payable under the Act. Income tax is charged in respect
of the total income of the previous year of every person. Therefore, it makes it important to
know the definition of the word person. As per Section 2(31) of the Act the term person
includes an individual, a Hindu Undivided Family (HUF), a company, a firm, an association
of persons or a body of individuals whether incorporated or not, a local authority and every
artificial, juridical person, not falling within any of the mentioned categories. By virtue of
Sections 2(7) and 2(31) HUF is an assessee and is liable to be taxed under the Act.

Income tax is a charge on the assessee’s income. Income tax of an assessee is calculated by
determining the residential status of the person as per section 6 of the Act and by calculating
the income as per the provisions of respective heads of income. Thus the scope of this project
is to understand the HUF as an taxable entity and to determine its tax treatment by testing its
residential status as well as by understanding the methods of commuting its income as
distinct from the income of the members. In the later part, HUF has also been analysed as the
tool for tax planning and tax saving. is a good tax saving tool as it is regarded as a separate
legal entity under the tax law and also assessed to tax separately as a distinct legal person.
This implies that a person can file two income tax returns, one in his personal individual

1
Hereinafter referred as the Act.

Page | 6
 Concept of Hindu Undivided Family as taxable entity and its tax
treatment with special reference to its residential status

capacity and one in the name of his HUF. This gives the benefits of dividing his taxable
income between two entities and hence, he can claim double deductions and expenses in both
capacities, thereby reducing his total taxable income and tax liability substantially.

OBJECTIVES OF THE STUDY

The Objective of this project is to:

a) To understand the concept of Hindu Undivided Family as a taxable entity.

b) To examine the residential status of the Hindu Undivided Family for the purpose of
taxation.
c) To analyze the tax treatment of Hindu Undivided Family.

RESEARCH METHODOLOGY

This project work is descriptive & doctrinal in approach. It is largely based on the taxation
laws relating to Hindu Undivided Family as provided in the Income tax Act, 1961. Books &
other references as guided by faculty of Laws on Taxation are primarily helpful for the
completion of this project. This project has been done after a after a thorough research based
upon intrinsic and extrinsic aspects of the project.

Page | 7
 Concept of Hindu Undivided Family as taxable entity and its tax
treatment with special reference to its residential status

HINDU UNDIVIDED FAMILY

As the name suggests, an HUF is a family of Hindus. However, even Buddhists, Jains and
Sikhs are regarded as Hindus, and can, therefore, set up HUFs. The concept of an HUF has
basically evolved from ancient Hindu law. There are two schools of law governing HUFs in
India-Mitakshara and Dayabhaga-and there are quite a few differences in the rights and
obligations of HUF members in each of these schools.

There are some essential conditions that must be fulfilled to qualify as an HUF. These are
outlined below:

 Only one member or co-parcener cannot form an HUF;

 The joint family continues even in the hands of females after the death of the sole
male member;
 An HUF need not consist of two male members. One male member is enough. For
example, a father and his unmarried daughters may form and HUF.

A Hindu Joint Family consists of two types of members:

a. Coparceners: The lineal male descendants of a person upto the third generation of
such person are known as coparceners. The coparceners acquire, on birth, ownership
in the ancestral properties of such ascendant and have a right to claim partition of
such property at any time. However, w.e.f. 9.9.2005 due to amendment of Hindu
Succession Act, the daughter of a coparcener shall by birth become a coparcener in
her own right in the same manner as the son. Hence, the daughter can also ask for
partition.
b. Other members: Such members include wives of male members of the family and
other male members.

Thus, a Hindu Joint Family may consist of all persons lineally descended from a common
ancestor and includes their wives and daughters (w.e.f. 9.9.2005) and a male and widow or
widows of deceased male member or members.2 However, an unmarried coparcener who
receives share on the partition of joint family properties cannot form a Hindu undivided

2
Gowli Buddanna v. C.I.T. (1966) 60, ITR, p. 293 (S.C.)

Page | 8
 Concept of Hindu Undivided Family as taxable entity and its tax
treatment with special reference to its residential status

family unless he marries. After his marriage, he can hold the property received from family
as joint family property consisting of himself and his wife.

HINDU UNDIVIDED FAMILY AS A TAXABLE ENTITY

A HUF is a separate entity for taxation under the provisions of S.2 (31) of the Income Tax
Act, 1961. This is in addition to an individual as a separate taxable entity. This indicates that
a person may be assessed in two different capacities- as an individual and as a Karta of his
HUF.

HUF is also required to file Income Tax Return every year just like an Individual and if the
turnover of the business of the HUF is more than Rs. 25 Lakhs/ Rs. 1 Crore, tax audit under
Section 44AB would also be required to be conducted by a Chartered Accountant. Due Date
of filing of Income Tax Return of the HUF would be 31st July of the Assessment Year.
However, in case the Tax Audit is required to be conducted, the Due Date of filing of Return
would be 30th Sept.3

The Karta of the HUF has the power to sign all documents on behalf of the HUF. However,
he may also permit other adult members to have this power. HUF’s are recognised all over
India except Kerala wherein HUF’s are not recognised. This de-recognistion was done
by Kerala Joint Family System (Abolition) Act, 1975 with effect from 01.12.1976

The HUF may be a resident or a non-resident in India depending on where the control of the
HUF is residing.

Formation of HUF

A HUF means a family of Hindus. However, under the Indian tax law, persons belonging to
the Jain and Sikh religion can also form HUFs. The existence of a HUF requires at least two
members of a family, of which at least one should be male. A HUF can also consist of the
male members and female members, being their wives and unmarried daughters. Once a
member of a HUF receives any ancestral property from any ancestor three generations above

3
Available at: http://www.succinctfp.com/index.php/know-all-about-huf-how-to-save-taxes-by-forming-huf/
(accessed on: 15/8/15).

Page | 9
 Concept of Hindu Undivided Family as taxable entity and its tax
treatment with special reference to its residential status

him, a HUF is automatically created. The person who manages the affairs of the family is
known as the karta. Normally, the senior- most member of the family acts as karta. However,
a junior male member can also act as karta with the consent of the other members. For
example, if a married Hindu male person receives any ancestral property from his great
grandfather, that property will be automatically regarded as his HUF’s property.

Another way to form a HUF is by receiving an asset or property by way of gift from a lineal
ascendant with a specific instruction by the donor that the same is being gifted to the HUF.
Although generally, a HUF always exists in a Hindu family, from a tax point of view, it is
created only when it receives assets or any property or is engaged in any commercial activity.
A PAN card may be issued by the Income-tax Department in the name of a HUF and an
account gets created for filing of tax returns.

Income of HUF and Karta

All income arising out of utilisation HUF’s properties and from investment of HUF’s funds is
income of the HUF and is separately assessed in its hands. One should be careful to declare
only that income to tax in the returns of a HUF which is earned out of the HUF assets or
investments. Any income, which arises out of personal income of a member will be regarded
as the member’s individual income and not the income of HUF. A HUF can also contribute
funds or capital in a partnership firm and the share in profits arising to the HUF will be
regarded as income of HUF and will be taxed accordingly in the hands of the Karta or the
representative of the HUF. Therefore, a Karta can be taxed in two capacities, his personal
individual capacity and as Karta, for and on behalf of the HUF. 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. Since a HUF is a
separate legal entity, it can earn income from several sources such as income from house
property, profits from business, income from capital gains, and income from other sources.
However, a HUF cannot earn income from salaries as salary is earned for personal skills and
services rendered by an individual.

Assets of HUF

A HUF can hold assets such as shares, securities, jewellery, movable and immovable
property. These assets can be either acquired by a HUF by way of a gift which is specifically
instructed to be given to the HUF or it can receive assets on partition of a larger HUF of

Page | 10
 Concept of Hindu Undivided Family as taxable entity and its tax
treatment with special reference to its residential status

which its coparcener was a member and the same is treated as HUF property. Assets can also
be received by a HUF by way of instructions provided in a will where the assets are
instructed to be bequeathed to the HUF. However, after the enforcement of the Hindu
Succession Act in 1956, if there is no will, on the death of a benefactor, the assets cannot
devolve upon a HUF but only on the individual inheritors.

Assets received on the partition of a larger HUF of which the coparcener was a member (like
an HUF in which the coparcener’s father or grandfather was the karta), assets received as
gifts by the HUF could be received from close relatives or close friends and assets
bequeathed by a will that specifically favours the HUF also forms the property of HUF. In the
absence of a will, assets received on the death of a benefactor after 1956 (when the Hindu
Succession Act came into force) would not be regarded as HUF property, but as individual
property even though such assets have been inherited.

Commutation of Income of HUF

Income of a joint Hindu family may be assessed as income of a HUF if the following two
conditions are satisfied:

a. There should be a coparcenership. Once a joint family income is assessed as that of

HUF, it continues to be assessed as such in subsequent assessment years till partition
is claimed by its coparceners.
b. There should be a joint family property which consists of ancestral property, property
acquired with the aid of ancestral property and property transferred by its members.

The gross total income of the family for the relevant previous year shall be computed under
the relevant heads (as per the provisions of the Income-tax Act) as it is computed for other
assesses. Any income that arises on the investment of HUF funds (like interest earned on
loans given by an HUF) or on the utilisation of HUF assets (like rent earned on letting out
HUF property) would be regarded as HUF income. It is important that the income be earned
using HUF funds or property only.

If the income arises on account of the personal exertions of the karta or any other member
and not on investment of HUF funds, such income would generally be regarded as the
individual income of the karta or the member. If an HUF contributes funds to the capital of a
partnership firm, profit and interest received (from the firm) by a partner who represents the
HUF is regarded as HUF income. This is because the income in the partner’s hands arises on
Page | 11
 Concept of Hindu Undivided Family as taxable entity and its tax
treatment with special reference to its residential status

investment of the HUF’s funds. However, if the karta is also paid a salary by the firm for
efforts put in by him, such funds would be regarded as the karta’s individual income.
Speculative profit can be regarded as the income of an HUF, particularly in cases where the
HUF has paid margin money or deposits for such transactions.

However, for clubbing of Income:

 If the funds of a Hindu Undivided family are invested in a company or a firm, fees or
remuneration received by the member as a director, or a partner in the company or
firm may be treated as income of the family in case the fees or remuneration is earned
essentially as a result of investment of funds. But, if the fees or remuneration is
earned essentially for services rendered by the member in his personal capacity, the
income shall constitute the personal income of the member.
 For determining whether a particular income belongs to a member of the family or to
his undivided family, the Supreme Court has enunciated certain principles. The
question to be considered in such cases is, whether the remuneration received by the
coparcener is in substance merely a mode of return made to the family because of the
investment of the family funds in the business or whether it is a compensation for
services rendered by the coparcener. If it is the former, it is an income of the HUF but
if it is the latter it is the income of the individual. If the income was essentially earned
as a result of the funds invested, the fact that a coparcener has rendered some service
would not change the character of the receipt. But if, on the other hand, it is
essentially a remuneration for the services rendered by the coparcener, the
circumstances that his services were availed of because of the reason that he was a
member of the family which had invested funds in that business or that he had
obtained the qualification shares from out of the family funds would not make the
receipt the income of the HUF.4 The Supreme Court’s decision has come to stay as
one of the most followed/applied case laws. This decision had been followed by
Patna (Full Bench), Allahabad, Bombay and Gujarat High Courts, applied by Andhra
Pradesh, Madras, Kerala, Delhi, and Supreme Court itself. It would suffice to refer to
the Supreme Court’s decision in the case of holding that the share income was a
return made to the family because of the investments of the family funds in the
business and the share income was not the individual income of minor sons but was

4
Raj Kumar Singh Hukam Chandji v. CIT (1970) 78 ITR 33.

Page | 12
 Concept of Hindu Undivided Family as taxable entity and its tax
treatment with special reference to its residential status

the income of the Hindu undivided family and had to be assessed in the hands of the
family.5
 Where a member of a HUF is a partner in a firm on behalf of the family and on
partition of the property of the family, the share in the firm is allotted to such a
member, subsequent to such allotment when the firm settles its accounts the whole
income for that year would be the income of the individual member and no part of the
income would be added to the income of the family.6
 The personal earning, including income from self acquired property of a member of
the HUF, even though he has sons, would not be included in the income of the
family. Such income shall be assessed as income of that individual.7
 Any sum paid by an HUF to a member of the family out of its income is not
deductible in computing the income of the family. However, such amount will not be
included in the income of such individual whether the family had paid tax on its
income or not [Section 10(2)].
 If any remuneration is paid by the Hindu Undivided family to the karta or any other
member for services rendered by him in conducting family’s business, the
remuneration is deductible if remuneration is (a) paid under a valid and bona fide
agreement; (b) in the interest of, and expedient for, the business of family; and (c)
genuine and not excessive.8
 If salary is paid by the Hindu undivided family to its karta for looking after its
interest in firms in which it is partner through said karta, such salary is allowable as
deduction.9
 Income from ‘stridhan’ is not includible in the income of the family. Property derived
by a woman from her father or brother or husband or any other relative either before
or after her marriage is known as ‘stridhan’.
 If a member has converted or transferred without adequate consideration after
December 31, 1969 his self-acquired property into joint family property, income
from such property is not taxable in the hands of the family.
 Income from impartible estate is taxable in the hands of the holder of the estate and
not in the hands of the Hindu undivided family. Though, the impartible estate belongs

5
Y.L. Aggarwalla and others v. Commissioner of Income-tax (1978, 114 ITR 471)
6
CIT v. Ashok Bhai Chiman Bhai (1965) 56, ITR, 42 (S.C.)
7
Kalyanji Vithal Das v. CIT (1937) 5 ITR 90 (PC)].
8
Jugal Kishore Baldeo Sahai v. CIT [1967] 63 ITR 238 (SC).
9
CIT v. Prakash Chand Agarwal [1982] 11 Taxman 55 (MP).

Page | 13
 Concept of Hindu Undivided Family as taxable entity and its tax
treatment with special reference to its residential status

to the family, income arising therefrom belongs to the holder of the estate who is the
senior most male member of the family. Income from impartible estate is taxable in
the hands of the holder of the estate.
 Personal income of the members cannot be treated as income of Hindu undivided
family.
 Under the Dayabhaga School of law, as stated in a preceding page, no son has any
right in the ancestral property during the lifetime of his father. If, therefore, the father
does not have any brother as a coparcener, income arising from ancestral property is
taxable as his individual income.

Assessment after partition (Section 171)

A joint family, once assessed as a HUF, continues to be assessed as such till one or more
coparceners claim partition. Such claim must be made by the coparceners before the
assessment of the income of the HUF for the relevant assessment year is completed. On the
receipt of such a claim, the Assessing Officer must make an inquiry after giving due notice to
the members and record a finding whether there has been a partition and, if so, the date of the
partition. The income of the family from the first day of the previous year to the date of
partition is assessed as income of the HUF and from the next date of the partition to the date
of close of the previous year, as the individual income of the recipient-members. If the
recipient member forms another HUF along with his wife and son(s), the income of the
property which was subject to partition is chargeable to tax in the hands of the new H.U.F.

A partition of the HUF can be both total and partial. Where the entire joint family property is
divided among all coparceners and the family ceases to exist as an undivided family, the
partition is total. A partial partition may be as regards: (a) the persons constituting the joint
family, or (b) the properties belonging to the joint family, or (c) both. The device of partial
partition has been used as a medium for reduction of proper tax liability. To curb such a
practice, the Finance (No. 2) Act, 1980 inserted Sub-section 9 in Section 171 which lays
down that partial partitions of HUFs effected after 31st Dec., 1978 will not be recognised for
tax purposes. The provisions made by Sub-section (9) in Section 171 are as follows:

i. In a case where a partial partition of a HUF has taken place after 31.12.1978, no
claim of such partition will be enquired into and the Assessing Officer will not record

Page | 14
 Concept of Hindu Undivided Family as taxable entity and its tax
treatment with special reference to its residential status

a finding as to whether there has been a partition of the family property. Further, any
finding regarding partial partition recorded under Section 171(3) will be null and void
and of no legal effect.
ii. Such family will continue to be assessed as if no such partial partition has taken
place, i.e., the property or source of income will be deemed to continue to belong to
the Hindu undivided family and no member will be deemed to have separated from
the family.
iii. Each member or group of members of such family will be jointly and severally liable
for any tax, interest, penalty, fine or other sum payable under the Act by the family,
whether before or after such partition. The several liability of any member or group
of members of such family will be computed according to the portion of the joint
family property allotted to him on such partial partition. This amendment has come
into force with effect from April 1, 1980 and has, accordingly, been applicable with
effect from assessment year 1980-81 and onwards.

Exemptions available to a HUF

The maximum amount of income which is not chargeable to a HUF is Rs.2,50,000.

Any sum received by an individual in his capacity as a member of H.U.F. is wholly exempt
from income-tax where such sum has been paid out of the income of the family, or out of the
income of an impartible estate belonging to the family, because that has been taxed in hand of
H.U.F.

This exemption is, however, subject to the provisions of Section 64(2), where the income
from self acquired assets which are converted into property of the H.U.F. are to be clubbed
with the income of the person who makes the conversion subject to certain conditions. For
the purpose of this exemption, it is immaterial whether the H.U.F. has been subject to tax in
respect of the income. It is also immaterial whether the member who has received the share
of income from the family is a coparcener or not but he must be a member of that family at
the time of receiving the money.

Page | 15
 Concept of Hindu Undivided Family as taxable entity and its tax
treatment with special reference to its residential status

RESIDENTIAL STATUS OF HINDU UNDIVIDED FAMILY

The test to be applied to determine the residential status of a HUF is based upon the control
and management of the affairs of the assessee concerned. The tests based on the period of
stay in India applicable to individuals cannot be applied to these assessees for obvious
reasons.

Meaning of place of control and management

The expression control and management refers to the functions of decision-making and
issuing directions but not the places where from the business is carried on. In other words, the
control and management means taking policy decisions relating to business. Policy decisions
are concerning finance, marketing, production, advertising, personnel etc. It does not mean
day to day operations of the concern/assessee. The control and management is situated at that
place where policy decisions are taken.

The control and management of HUF is with Karta or its Manager. A HUF, firm or other
association of persons is said to be resident in India within the meaning of Section 6(2) in any
previous year, if during that year the control and management of its affairs is situated wholly
or partly in India. If the control and management of its affairs is situated wholly outside India
during the relevant previous year, it is considered non resident.

A HUF as Resident but not ordinarily resident

A HUF can be “not ordinarily resident” if manager/karta has been a not ordinarily resident in
India in the previous year in accordance with the tests applicable to individuals. Where,
during the last ten years the kartas of the H.U.F. had been different from one another, the
total period of stay of successive kartas of the same family should be aggregated to determine
the residential status of the karta and consequently the H.U.F.

In other words, if Karta of Resident HUF satisfies both the following additional conditions
(as applicable in case of Individual) then Resident HUF will be Resident and Ordinary
Resident (ROR) , otherwise it will be Resident and Not Ordinary Resident. The additional
Conditions are:

Page | 16
 Concept of Hindu Undivided Family as taxable entity and its tax
treatment with special reference to its residential status

i. Karta of Resident HUF should be resident in atleast 2 previous years out of 10

previous year immediately preceding relevant previous year.

ii. Stay of Karta during 7 previous year immediately preceding relevant previous year
should be 730 days or more.

It is immaterial whether Karta is Resident or Non-Resident during relevant previous year, for
the purpose of determining whether HUF is ROR or RNOR. If Karta satisfies both the
additional conditions, then HUF will be ROR, otherwise RNOR.

Even if negligible portion of the control and management of the affairs is exercised from
India, it will be sufficient to make the family resident in India for tax purposes. For instance,
if the affairs of a firm are controlled partly from India and partly from Bangladesh, the firm
would be resident both in India. While the control and management of the affairs of the firm
or family would necessarily be exercised by the partners of the firm or members of the
family, the residential status of the members or partners is generally irrelevant for
determining the residential status of the firm or family. But in cases where the residential
status of the partners materially affects or determines the place of control and management of
the affairs of the firm, the residential status of the member or partners should also be taken
into account in determining the residential status of the firm or the family.

A Hindu Undivided Family would generally be presumed to be resident in India unless the
assessee proves to the tax authorities that the control and management of its affairs is situated
wholly outside India during the relevant accounting year.

A HUF as Non-resident HUF

What applies to non-resident individuals will also, in some cases, be applicable to a non-
resident HUF. A HUF, whose management and control is exercised wholly outside India
during the financial year. From a tax point of view, if it can be shown that all decisions
concerning the family members and the affairs of the HUF were taken outside India during
the relevant year, that HUF will enjoy all benefits also available to a non-resident individual
and the same tax exemptions.

Page | 17
 Concept of Hindu Undivided Family as taxable entity and its tax
treatment with special reference to its residential status

HINDU UNDIVIDED FAMILY AS A TAX SAVING TOOL

As income from sources such as income from house property or income from business or
capital gains can be taxed separately in the hands of a HUF and is not clubbed with the
individual’s income, there can be substantial savings in taxes as income is divided between
two entities, that is, the individual and the HUF and expenses and deductions can also be
claimed from both incomes, individual, as well as HUF. Further, if an individual is already
employed with somebody, he can carry out a business and earn income in the name of a HUF
and he can get the benefit of exemptions and deductions from that income too.

An important benefit of creation of HUF is that any income earned by an individual in his
capacity as member of HUF is not taxable in his individual capacity as it is already taxed in
the hands of the HUF. A HUF, being eligible for all the exemptions and deductions as are
available to an individual, it results in considerable tax savings as the total personal income of
an individual, who is a member of a HUF is divided into his personal capacity and in the
hands of the HUF. Joint assets or properties under inheritance for the entire family can be
gifted to the HUF instead of gifting to individual members of the family. This can result in
tax savings as there is no gift tax or inheritance tax and clubbing of income provisions will
also not apply.10 Similarly, a Karta of a HUF can give, by way of gifts, certain amounts or
assets out of HUF properties, to its members over a period of time to gradually build assets in
their names.

A HUF can also build its capital by way of borrowings from non-members and the income so
earned from investments of the capital will only be HUF income. Individual members may
also transfer their personal funds in a HUF for the purpose of investment in tax free
instruments. Income thus earned from these instruments will be tax free and cannot be
clubbed with the individual’s personal income. Such income, if it is reinvested in instruments,
income of which is subject to tax, will also not be clubbed as only the income earned from
transferred amounts is clubbed.11

One can enhance the income of HUF by ensuring that gifts or inheritances meant for the
benefit of all the members of a family are gifted specifically to the HUF, instead of separately

10
CA A. K. Jain , HUF & Tax Implications, available at: http://www.tjaindia.com/articles/arrangement-
211108.htm (accessed on 16/8/15.)
11
Jyoti Dialani, Hindu Undivided Family: Tool for Tax Planning For Non-Resident Indians, available at:
http://www.singhania.com/Publication/HUF.pdf (accessed on 16/8/15).

Page | 18
 Concept of Hindu Undivided Family as taxable entity and its tax
treatment with special reference to its residential status

to individual members of the family. In the absence of gift tax and estate duty, neither the
benefactor nor the recipient would attract tax on such a transfer. One can also enhance an
HUF’s capital by borrowing funds from people who are not members of the HUF. Such funds
should then be invested in the HUF’s name. This is important, as is borrowing money
specifically in the HUF’s name. The income arising on such investments would then be
regarded as the income of the HUF. Another way of enhancing capital without adverse tax
implications is to transfer individual funds to the HUF. These funds should then be invested
in tax-free instruments, like the Reserve Bank of India’s relief bonds, and units of mutual
funds, in the HUF’s name. Since the income from such investments is tax-free, it will not be
clubbed with the individual’s income. What’s more, the income arising on the reinvestment
of such tax-free income (which may be in taxable income-yielding assets) will not be
clubbed, since only income arising on transferred amounts is clubbed.

Page | 19
 Concept of Hindu Undivided Family as taxable entity and its tax
treatment with special reference to its residential status

CONCLUSION

HUF is a very old concept in India. Hindu Undivided Family concept comes from joint
family of Hindu where there are many members earning separately and some income arises
from jointly like rent received from jointly owned property etc.

A Hindu Undivided Family (HUF) is a separate entity for taxation 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; it means that the same person can be assessed in two different capacities viz.
as an individual and as Karta of his HUF.
HUF gets the advantages of Income Tax Slab rate taxability and also qualifies for deduction
u/s 80D(insurance premium paid on health of its members), 80G (Donation), 80L (income
from bank and post office), 80C under the Income Tax Act 1961. It can also take exemptions
under Section 54 and 54F with respect to Long term capital gains.
Under Wealth Tax Act, 1957 HUF is treated as distinct entity and enjoys separate taxability.
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.
Also gifts collected up to a worth of Rs 50,000 will be tax free. A father who owns a HUF
account can gift a property or money of higher worth to a son who owns a smaller HUF
account; but he should specify that the gift is for the son’s HUF and not to him as an
individual. Under section 64(2) and 56(2) tax benefits can be enjoyed in such instance. As
income from sources such as income from house property or income from business or capital
gains can be taxed separately in the hands of a HUF and is not clubbed with the individual’s
income, there can be substantial savings in taxes as income is divided between two entities,
that is, the individual and the HUF and expenses and deductions can also be claimed from
both incomes, individual, as well as HUF. Further, if an individual is already employed with
somebody, he can carry out a business and earn income in the name of a HUF and he can get
the benefit of exemptions and deductions from that income too.

Page | 20
 Concept of Hindu Undivided Family as taxable entity and its tax
treatment with special reference to its residential status

BIBLIOGRAPHY

BARE ACT:

 Income Tax Act, 1961 and Income Tax Rules, 1962.

 The Hindu Succession Act, 1956.

BOOKS REFERRED

1. AHUJA GIRISH, GUPTA RAVI; SYSTEMATIC APPROACH TO INCOME-TAX, SERVICE TAX

AND VAT (BHARAT LAW HOUSE 2014-2015).

2. SINGHANIA V.K..; STUDENTS GUIDE TO INCOME-TAX INCLUDING SERVICE TAX/VAT

(Taxmann Publications, 46TH Ed. 2011-2012).

ARTICLES REFERRED

 CA A. K. Jain , HUF & Tax Implications, available at:

http://www.tjaindia.com/articles/arrangement-211108.htm (accessed on 16/8/15.)
 Jyoti Dialani, Hindu Undivided Family: Tool for Tax Planning For Non-Resident
Indians, available at: http://www.singhania.com/Publication/HUF.pdf (accessed on
16/8/15).

WEBSITES REFERRED

 http://www.academia.edu/

 http://www.indiankanoon.org.

 http://www.legalservicesindia.com/

 http://www.manupatra.com.

 http://www.succinctfp.com/index.php/know-all-about-huf-how-to-save-taxes-by-
forming-huf/

Page | 21
Concept of Hindu Undivided Family as taxable entity and its tax
treatment with special reference to its residential status

Page | 22