TAX PLANNING THROUGH HUF

- Kaushal Bhindora

HUF

u/s 2(31)(ii) of the IT Act,1961 defines the word ‘person’, which includes HUF.

Therefore, an HUF is a separate assessable entity under the Income Tax Act,1961 and Wealth Tax Act,1957.

BASIC CONCEPTS

Who are considered Hindus?

Those who are Hindus by Birth and Religion

Jains and Sikhs

Children whose both parents are Hindus

Any child whose father or mother is a Hindu and who is brought up as a Hindu

Those of certain Hindu Sampradayas (Arya Samaj, Swaminarayan, Brahma Samaj)

WHO ARE NOT CONSIDERED HINDUS?

Muslims

Parsis

Christians

Those who have converted from Hinduism

CREATION OF HUF

Modes of creation of HUF are:

1) By Gifts from Members;

2) By Gifts from Non Member;

3) By Will;

4) By ancestral property;

TAX SLABSSlab Rate of interest

Up to 2,00,000 Nil2,00,001-500000 10%

5,00,001-10,00,000 20%Above 10,00,000 30%

Education Cess 2%Higher Education Cess 1%

Mr. “X” HUF

MEMBERS OF MR. “X” HUF

Any individual up to 4th generation descendentSr. No. Individual Member

1. Mr. “X” Yes

2. Mrs. “X” Yes

3. Son “X” Yes

4. Daughter “X” Yes

5. Father “X” No

KARTA OF MR. “X” HUF

Senior Most Male MemberSr. No. Individual Karta

1. Mr. “X” Yes

2. Mrs. “X” No

3. Son “X” No

4. Daughter “X” No

CO-PARCENER OF MR. “X” HUF

Individual who can demand partition

(* w.e.f 9th September 2005)

Sr. No. Individual Co-parcener

1. Mr. “X” Yes

2. Mrs. “X” No

3. Son “X” Yes

4. Daughter “X” Yes*

CO-PARCENERY OF MR. “X” HUF

Individual who can share property on partition of HUF

Sr. No. Individual Karta

1. Mr. “X” Yes

2. Mrs. “X” Yes

3. Son “X” Yes

4. Daughter “x” Yes

SEPARATE DEDUCTION U/S 80C, 80D, 80G, 80IA, 80IB

Deduction available to HUF as per section 80C. [Insurance Premium can be paid on the life of any member.

Section 80D deduction available on Mediclaim Policy on the health of any member of the family.

Section 80G Donation to recognised Charity Trust. Sections 80IA / 80IB for New Industrial undertakings.

SOME OTHER SEPARATE DEDUCTION

Separate partnership share. Salary to Karta /Member. No T.D.S. on Interest. Separate Income-tax Deduction on Interest for self occupied

House Property. Separate entitlements to exemption from capital gains u/s 54,

54EC, 54F etc.

STOCK MARKET, MUTUAL FUNDS & HUF’S

HUF can have a separate Demat Account. 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 Enjoy lower tax rate of 15% on Short-term Capital Gains. HUF can also invest in Mutual Fund.

HUF AS PROPRIETOR OF BUSINESS

HUF can be a Proprietor of one or more than one Business concerns.

Separate name can be kept of HUF business entity.

No tax Audit of HUF business if Turnover within Rs. 1 crore.

Business Income Computation @ 8% without books of account in case turnover is up to Rs. 1 crore – The Presumptive Basis

ON 9TH SEPTEMBER 2005, THE HINDU SUCCESSION ACT, 1956 WAS AMENDED TO PROVIDE THAT

A daughter too could be a coparcener, like her brother to the joint family's assets and she too could enforce the partition of the family property to claim her individual share.

She continues to be the coparcener in her father's HUF even after she gets married and forms another HUF with her husband. So gender bias has largely been taken out of the HUF laws.

Partition of HUF(1)

Total Partition(2)

Partial Partition

1. TAX IMPLICATIONS OF FULL PARTITION OF HUF

All the properties of HUF is distributed amongst all the co-parceneries.

HUF is discontinued.

2. TAX IMPLICATIONS OF PARTIAL PARTITION OF HUF

As per section 171(9) of the Income-tax Act, 1961 the Partial Partition after 31-12-1978 is not recognized.

Partial PartitionRegards Persons

Any one or more co-parcener is given his/her share

Regards Property

Any one or more property is distributed to all the co-parceneries

Old Rule (Survivorship) (M&M)

Before Death After Death

Interest Rs. 1,20,000 Interest Rs. 1,20,000

Taxed To Mr. “X” HUF  Taxed To Deceased Mr. “X” HUF

Co-Parcenery Co-Parcenery

  Mr. “X” = 1/3 Mrs. “X” = 1/3 Son “X” = 1/3

Daughter “X" = M& M  

  Mrs. “X” = ½ Son “X” = ½

Daughter “X" = M& M  

1. Mr. “x” HUF • Bank Fixed Deposit Rs 12, 00,000 @10% p.a.• Members Mr. “X”, Mrs. “X”, Son “X”, Daughter “X”• Assume Mr. “X” Dies

New Rule (Succession) [Daughter Equal Right]

Before Death

Interest RS 1,20,000

Taxed to Mr. “X” HUFCo-ParceneryMr. “X” = ¼Mrs. “X” = ¼Son “X” = ¼

Daughter “X” = ¼

After Death* 10% F.D Rs.12,00,000

Mr. “X” = ¼F.D Rs.3,00,000

WILL

It will as per WIL

L

NO WILL

Mrs. “X”

Rs.1,00,000

Taxed Mrs. “X”

Son “X”

Rs.1,00,000

Taxed Son “X”

Daughter “X”

Rs.1,00,000

Taxed Daughter “X”

Total Rs.9,00,000 F.D 10%

Interest Rs.90,000Taxed to deceased

Mr. “X” HUF

Computation of Income

Aggregate of :- Income under the head House Property. Profits and gains from business & profession Income from capital gains Income from other sources

Less: deduction under chapter VIA i.e., 80C, 80D,80DD, 80DDB, 80G, 80GGA, 80HHB, 80HHBA,80HHC, 80HHD, 80HHE, 80HHF, 80I, 80IA, 80IB,80L & 80O.

CONTINUED..... Calculate Tax on Total Income Less: relief u/s 86, 90 & 91 Add: Interest u/s 234A, B & C Less: TDS & Advance Tax Less: Self Assessment Tax Balance Tax payable / Refund

due

RELATIVESr. No.

Section Provision Relative

1. 40(a)(ii) Payment to relative – if Excessive - Disallowed

Member – HUF – RelativeHUF – Member – Relative

2. 56(2) Gift received from Relative of any amount is Exempt.

Member – HUF – RelativeHUF – Member – Non-relative

3. 64(2) Income on assets received in gift from relative is clubbed to transferor.

Member – HUF – RelativeHUF – Member – Non-relative

Total Mr. “X” Mrs. “x” Son “X” Mr. “X” HUF

Total Income

44,60,000 11,15,000 11,15,000 11,15,000 11,15,000

Less : 80C

1,00,000 1,00,000 1,00,000 1,00,000 1,00,000

Less : 80 D

15,000 15,000 15,000 15,000 15,000

Taxable Income

42,85,000 10,00,000 10,00,000 10,00,000 10,00,000

Basic Exemption

2,00,000 2,00,000 2,00,000 2,00,000 2,00,000

Total Tax Liability

11,48,965 1,33,900 1,33,900 1,33,900 1,33,900

Tax Saved = 6,13,365 [11,48,965 – (1,33,900 + 1,33,900 + 1,33,900 + 1,33,900)]

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Salient Features of HUFs and Landmark Rulings:

1. A single member cannot be treated as HUF.

1. C. Krisnaprasad 97 ITR 493 (SC)

2. HUF may consist of single male and widows of deceased males, A single male, his wife and daughters.

2. Gowli Buddana 60 ITR 293 (SC)

3. Family may be formed by partition though not be survivorship.

3. N.V. Narendranath 74 ITR 190 (SC)

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4. On partition of bigger HUF, a coparcener and his wife can constitute HUF.

4. Soth Tulsidas Bolumal 170 ITR 1 (AP) Krishnakumar 143 ITR 462 (MP)

5. It is possible to constitute HUF on marriage of an individual male, if he has received asset on inheritance or partition.

5. Premkumar 121 ITR 347 (ALL)

6. Took a contrary view to (5) above.

6. Vishnukumar 142 ITR 357 (ALL)

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7. Individual property of father who dies after Hindu Succession Act came into force (17-6-56) devolves on sons As individuals. Even the property held by a father received on partition, on death of father, on second partition, is Son’s separate and individual property.

7. Chander sen 161 ITR 370 (SC)

8. For Right of a surviving female relative, Sec. 6 of H.S. Act (Explanation) lays down that there will be deemed partition.

8. Gurupada Khandappa Madgam Vs. Hirabai 129 ITR 440 (SC)

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9. But HUF even then continues- Explanation: - merely helps to identify the share of female members and their Legal heirs.

9. State of Maharastra Vs. Narayan Rap 163 ITR 31 (SC)

10. On death of sole male member after HS Act (17-656) females heirs receive property as their absolute property.

10. Smt. Nagarathnama 76 ITR 352 (MYS) Knatilal Manilal 90 ITR 289 (GUJ)

11. HUF can consist of husband and wife only

11. C.I.T. vs. Arunkumar Jhunjhuwala 138 CTR 63

Important links http://wirc-icai.org/wirc_referencer/income%20tax%20&%20wealth%20tax/Taxation%20of%20Huf.htm

THANKING YOU. . .

By kaushal