There was a time when a Hindu Undivided Family (HUF) was useful as a tax-saving device. Now that it is possible to save tax on investible funds irrespective of the size, thanks to a liberal tax regime on financial assets such as shares, convertible debentures and MF schemes, the utility of HUF has become considerably diluted. However, that being said, the concept of an HUF nonetheless remains an intergral part of the Indian tax planning environment and every taxpayer should know how he can use this tool to his advantage. But first, a little background.
India is the only country in the world where the unique institution of HUF exists. The origin of the HUF dates back to the epic era. It symbolises the practice of father, sons or brothers living together and jointly sharing, not only estate, but also food and worship. The concept of HUF applies not only to members of the Hindu religion but also Jains, Sikhs and Indian Buddhists.
HUF is a body consisting of persons, male or female, who are Sapindas (=DNA) of each other by birth, marriage or adoption. The tie of Sapindaship is a necessary and sufficient test being a member of an HUF.
There are two main schools of Hindu law. Dayabhaga exists in Bengal, Assam and some parts of Orissa while Mitakshara prevails in rest of the country. There are a few other schools like Marumkkatayam and Aliyasantana existing in some coastal parts of South and South-West India.
As per the Dayabhaga tradition, no son has any right in the ancestral property during the lifetime of his father and therefore, cannot demand partition. When a father is alive, he is assessed as an individual and not as an HUF. After the death of the father, the sons do not spontaneously become members of the joint family, unless they voluntarily decide to live as a joint family — CWT v Gauri Shankar Bhar (1968) 68ITR345 (Cal). Therefore, if the father does not have any brother as a coparcener, income arising from ancestral property is taxable as the son’s individual income.
There are conflicting views as to whether a Dayabhaga Hindu can constitute an HUF with his children and his wife, since he has no right to the ancestral or separate property during his lifetime. One view with which we agree is that the essential characteristic of an HUF, common to all schools of Hindu law, is ‘sapindaship’ and not the holding of a joint family property. Therefore, any Hindu belongs to an HUF with his wife and children as sapindas.
We shall concentrate mainly on the Mitakshara School.
An HUF consists of coparceners i.e., the sons, grandsons and great-grandsons of the holder of the joint property for the time being — three generations next to the holder in unbroken male descent. The fact that a member of a joint family is living apart from the other members does not affect the position in law. Female members were not coparceners and had no right to demand partition. The wives and unmarried daughters were entitled to maintenance out of their family property. The senior most male member of the family usually managed the affairs of the family as a Karta. However, the wife of a Karta had an equal share with all the coparceners. The composition of an HUF keeps fluctuating due to births, deaths, marriages and adoptions.
This male bias has now been changed in to:
Hindu Succession (Amendment) Act, 2005
The Hindu Succession Act, 1956 has been amended w.e.f. 6.9.05, mainly Sec. 6. Accordingly, —
A daughter of a coparcener shall, by birth become a coparcener in the HUF in her own right in the same manner as the son. She has the same rights in the coparcenary property as she would have had if she had been a son. Such a right is available only to daughters and not to the other members of the family such as mother and wives and daughters-in-law.
Where a Hindu who has died after 20.12.04, his interest in the property shall devolve by testamentary or intestate succession, as the case may be, under this Act and not by survivorship, and the coparcenary property shall be deemed to have been divided as if a partition had taken place and—
a) The daughter is allotted the same share as is allotted to a son.
b) The share of a pre-deceased child, as they would have got had they been alive at the time of partition, shall be allotted to the surviving child of such pre-deceased child.
c) The same rule will be applicable to the share of a child of a predeceased child.
d) Widow of a predeceased son or a brother, even if she has remarried, is eligible to inherit the property. and
e) No court shall recognise any right to proceed against a son, grandson or great grandson for the recovery of any debt due from his father, grandfather or great grandfather solely on the ground of pious obligation.
Birth of an HUF
An HUF is not born because of some specific actions or events. It always exists but may not possess any joint assets.
Assessment can be made for the first time as an HUF upon —
* Inheritance by a person on succession of property from a male or female ancestor.
* A Hindu impressing his self-acquired property, either by gifting or blending, with the character of joint family property.
* An individual can receive a gift or bequest from an outsider clearly indicating that the donee should hold the gifted property not as an absolute owner but as his HUF.
* After the death of a male who has only daughters and no son, the wife and her daughters get equal share from the estate of the deceased male. They cannot form an HUF with this nucleus though the daughters are given coparcenary status. The assets received will be considered as their individual property.
It is not necessary that prior to such impressing there should exist some nucleus of ancestral or joint family property. The hotchpot may or may not be empty.
The nucleus can be formed or increased by a member by gifting or blending. Blending implies a gift of only that part of the converted property, as other members of the family would be entitled to if the partition had taken place immediately after such blending. Upon blending, income arising from the property, less his/her own share, is clubbed in the hands of the donor. For gift, the entire income is clubbed. If subsequent partition takes place, property allotted to the spouse and minor children will be deemed to be assets transferred to them indirectly. Therefore, any coparcener, including a Karta, will do well by taking the route of blend and not gift.
Where the income from converted property is clubbed with that of the individual, it is to be excluded from the income of the family. The same rule is applicable to wealth.
Next week we shall see the tax benefits associated with an HUF, the consequences of partitioning an HUF as also the process by which an HUF can come to an end.
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