How HUF status can save you tax

I n many financial transactions, people buying or selling immovable property -- residential, agricultural, commercial or
industrial property, or any movable property -- declare their status as that of Hindu Undivided Family, or HUF.
But a mere declaration by a Hindu buyer or seller of real estate, or any other asset, that his status is that of an HUF
cannot be accepted in law because there are certain legal requirements of a valid HUF status. Let us consider the main
aspects which need to be borne in mind in saving tax through HUF status.
Two schools of Hindu law
In India, Hindus are mainly governed by two schools of law, namely Mitakshara and Dayabhagh. In some parts of
India, particularly in south India, certain other systems are also prevalent.
The Dayabhagh system is especially prevalent in West Bengal and Assam, whereas for the rest of country for most of
the Hindus the law relating to the ownership, devolution, etc. of properties is the Mitakshara School of Hindu Law.
Generally speaking, under the Mitakshara School of Hindu Law the main principle is the survivorship principle in the
matter of devolution of the ancestral or HUF property, in contrast to the principle of succession which applies to the
individual property of a Hindu.
Another principle is that no member of the HUF, so long as the Hindu family remains joint, can be said to have a
specific share in the HUF property. It is only upon partition of an HUF that the share belonging to a particular member
can be ascertained.
Another way of attaining HUF status to a property is by way of partition and accretions to the partitioned property.
Thus, if the property of an HUF is partitioned amongst its members as per the HUF law, then the member receiving the
property will be said to hold it not in his individual capacity but as HUF, provided there is more than one member in the
family.
Further, if any addition is made to such partitioned HUF property, then the addition so made to such property also gets
the status of HUF property. It may be mentioned here that if an individual property is inherited as per the Hindu
Succession Law, then the property so inherited is not to be termed as partitioned property.
Very often a mistake is committed by the Hindus in declaring the property received by them on inheritance under the
Hindu Succession Act, as HUF property, whereas it is in truth only the individual property of the person inheriting it.
Another mode of acquiring the status of HUF in respect of property both movable and immovable is by a special gift
made by the father or mother of the male member of a family. In some cases, there may not be any ancestral property.
There might not have been any cases of partition of the HUF property and thus the status of a Hindu regarding his
property is that of individual only.
If he is interested in owning property in the status of HUF, he may get the gift of the property of any amount from his
father or mother, or any relative or friend, specifically for his own HUF consisting of himself, his wife and children. In
that case the amount so gifted by the father, etc. will form part of the HUF property.
If some loans are taken by that HUF and an immovable property or a movable property is purchased by the HUF, the
property so purchased will be known as HUF property. In some cases, the father, etc. may also pass on his individual
property to the children as HUF property through a specific declaration in a will. What is most relevant is the intention of
the donor to treat the gift for the specific recipient namely, whether the individual or the HUF.
Tax benefits of HUF
The question of HUF status for a Hindu buyer or seller of any property assumes importance because of certain tax
advantages attached with HUF under the income tax and wealth tax laws. Thus, if an individual has personal income
and has also HUF income, he would be entitled to have an exemption of Rs 150,000 for his individual income and
another Rs 150,000 for his HUF income.
Besides, he would also be eligible to a further income tax deduction or exemption of Rs 100,000 under Section 80C in
respect of LIC [ Get Quote ] premia, PPF contribution, NSC, etc., both on individual and HUF income separately.
Besides, under the Wealth Tax Act, 1957 too, separate exemptions are available for individual property and HUF
property.
Thus, where the taxable individual wealth is eligible to a general exemption of Rs 150.000, the HUF's taxable wealth is
also eligible to a further general exemption of Rs 150,000. Hence, persons having immovable property and jewellery
and motorcars under HUF status stand to gain from the extra exemption under Wealth Tax Act as well.
Full partition of HUF
One important aspect of Income Tax Act, 1961 to be borne in mind while effecting partition of an HUF is that only a
complete partition of the HUF is permitted. This is because under Section 171 of the Income Tax Act partial partition of
an HUF is not recognized in law.
Listed below are certain other incidental matters connected with HUF transactions which should also be taken care of.
Other points to keep in mind
The bank account should be in the name of either the HUF or in the name of the Karta by specifically declaring that the
account is that of the HUF only. Only the funds belonging to the HUF should be deposited in such an account.
Normally, the Karta of the HUF is entitled to sign the bank transactions. He may, however, also permit the other adult
members of the family to sign on behalf of the HUF.
Another important thing that can be remembered in connection with HUF property is that where a person wants to
transfer some property by Will to the members of his family, he can transfer the same for the specific purpose of the
HUF of his son or sons so as to constitute the amounts so transferred through will or so gifted by will as the HUF
property of the son(s) concerned.
This would result into a good deal of income tax and wealth tax saving for the persons inheriting such property by will
as mentioned above.

HOW ONE CAN CREATE HUF(HINDU UNDIVIDED FAMILY)

Though every body is interested in this question and this question has been asked by many and generally-
not-have-any-answer-in-text-book-also,-why-it-so?
The-answer-is-very-Interesting-that-the-above-question-is-wrong-the-correct-question-is"how-we_can-
create-capital-for-HUF-we-can-not-create-HUF-but-can-arrange-capital-for-it
"Till the time the HUF has an empty kitty; it is like a balloon that no one has yet blown air into. A balloon
can rightfully be called a "balloon only when it swells up with air inside it. Without the air the balloon is
inert, dormant. An HUF too is inert and dormant without funds.".. CA Sanjeev Bedi (Ludhiana)
"The million-dollar question indeed is: How to blow funds into the HUF and turn it into a balloon that
floats?
 A member of the HUF throwing his money into the common pool, or to use that
overused cliché' the family hotchpotch, is out of the question, thanks to Section 64(2) which would tax
the income earned by the HUF on that money in the individual member's hands only.
 But the clubbing provisions can be bypassed if the HUF invests the money in
instruments yielding tax-free income. The tax-free income can then be reinvested to earn even taxable
income--income on income is out of the clubbing provisions.
 Strangers can make gifts but only up to Rs 50000 (Section 56).
 A way-out is to receive gifts from members of bigger HUFs, who though your
relatives, aren't members of your smaller HUF.
 A father may make a gift of money to his son's newly-created HUF, clearly specifying
in the Gift Deed that the gift is to his son's smaller HUF and not to the son himself. This will keep both
Section 64(2)and Section 56(2) at bay.
 After the HUF has a nucleus of its own and gets going, care has to be taken to keep
the HUF's affairs completely distinct from the individual members' affairs. Where the members of the
HUF carry on their individual businesses, as they normally do, the distinction between what constitutes
the individual's income and what is HUF'sincome may get blurred.
 Some other people, who aren't members of the HUF but are relatives in terms of
Section 56(2) can also be found out.
Now everybody comfortable with the question because creating a capital by transfer ,gift and all like
stuff as hinted by Sanjeev we all know to some extent .
so
to have capital in huf account we should take following steps
we should have opened a bank account first (not must) but it is advisable so that we can have
transaction by cheques .
1. Apply for permanent account number (pan)
2. Formation of capital of huf , Transfer money by gifts etc to HUF capital keeping in
view the clubbing provisions and tax on gifts under Income tax act, Remember there is no Tax on gifts
in kind though they may attract clubbing provisions in some cases.

Regarding Huf an Interesting and detailed reply has been given by our group star contributor CA
Sanjeev Bedi we are giving abstract of the answer.
 The Hindu Undivided Family has its roots in the ancient Hindu law like the Manu Smriti,
compiled by a male chauvinist Hindu "Scholar "called Manu, who lived around 200 BC; the
Yajnavalikya Smriti compiled by Yajnavalikya and Narada in 100 and 200AD (it merely
 embellished what had already been laid down by Manu); and Mitakshara codified by a guy
called Vijneshwara somewhere around the year 1100AD. Mulla, the foremost authority on
Hindu law, has described the Mitakshara as "the quintessence of the Smriti law,its precepts and
injunctions".
 Later in the 12th century, there came along another variation of the Hindu law called the
Dayabhaga written by one Jimutavahana.
 The Dayabhaga challenged and deviated from the Mitakshara law in some ways, particularly
in relation to succession and inheritance.
o Under the Dayabhaga system,the father is the sole owner and the exclusive possessor
of the joint family property. No member can enforce the partition of the HUF so long as
the father lives.
o But the Mitakshara law stipulates that the property vests in the HUF itself and not in
any individual member of the family and therefore can be partitioned within the lifetime
of the father.
o The Dayabhaga law is prevalent in West Bengal and Assam.
o Hindus in the rest of the country are governed by the Mitakshara law.
 Manusmriti completely forbade women to have a share in the family property.
 The modern Indian government embarrassed by these antediluvian,anachronistic laws has
sought to bring them inline from time to time with the egalitarian values of 21st century.On 9th
September 2005, the Hindu Succession Act, 1956 was amended to provide that
 a daughter too could be a coparcener i.e. joint heir,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 evenafter she gets
married and forms another HUF with her husband.So gender bias has largely been taken outof the
HUF laws.
 A coparcener is one who has a right to demand that the family property be divided
and they be handed over their share in the property (or whatever assets the HUF has) in case he or she
decides to part ways with the HUF.
 Not all members of the HUF are its coparceners. The coparcenery extends to four
degrees down the family hierarchy in the following manner:
 1st degree :Holder of ancestral property for the first time.
 2nd degree : Sons and daughters(09.09.2005).
 3rd degree: Grandsons.
 4th degree : Great grandsons.
 The most frequently asked question about HUF is: How does it come into being? To
form an HUF, all you have to do is Get Married. The HUF gets created as soon as you complete the
seven (or four, whatever) circles round the holy fire and become Man and Wife.
 There have to be a minimum of two people to constitute a family. The husband and
wife together make up a family. They don't have to wait till they have a baby to constitute their HUF.
 Someone asked "Can an unmarried man create an HUF?" No, he cannot,if you
mean an HUF of which he seeks to be the Karta himself. He can very well be the member of the HUF
of his father or grandfather, but to create his own HUF he has to wait till he ties the nuptials.Come to
think of it, "Creation of an HUF" is an oxymoron—-acontradiction in terms. Only orphan-and-
unmarried Hindus don'tbelong to an HUF. Every Hindu becomes a member of an HUF the moment she
ejects out of her mother's womb, mode of delivery--C-section or Normal--notwithstanding.
 Till the time the HUF has an empty kitty,it is like a balloon that no one has yet blown
air into. A balloon can rightfully be called a "ball"oon only when it swells up with air inside it. Without
the air the balloon is inert,dormant. An HUF too is inert and dormant without funds.
 The Karta, which in Hindi means the Doer, is usually the Father, the pater familias of
the family. He has immense powers over the affairs of the family, more than any other coparcener can
wield.
 Can a female be the Karta? The answer can't be No in the light of the amendment in
the HS Act in 2005.An unmarried daughter, in the unfortunate event of her father passing away, will
become the Karta of the HUF if she has no brother.
 Can there be an all-female HUF? Yes, there can be. Where a couple has only one
issue—-a daughter—-and the husband passes away,the mother-daughter duo can continue the HUF
(although a problem mayarise after she gets married and becomes a member of her husband'sHUF). It
has been held by the Allahabad High Court in CIT v. Sarwan Kumar 13 ITR 361 (All) that there can be
an HUF consisting of female members only
 The Karta can enter into partnership with a firm on behalf of the HUF. But the
HUF itself, being not a legal person, can never be a partner in a firm. The fact that Income Tax law
grants a PAN to itand treats it as an assessable entity does not bestow upon it the status of a person
under the general laws. This has been held to be so in numerous cases. In Ram Laxman Sugar Mills v.
CIT 66 ITR 613(SC), the Supreme Court said that "an HUF is undoubtedly a person within the meaning
of the Indian Income Tax Act, It is however,not a juristic person for all purposes and cannot enter into
an agreement of partnership either with another undivided family or individual".
 So while conducting bank audit, in case you come across a loan filewhere the HUF is
shown to be the partner, raise an objection.
 There have been cases where the courts have held that businesses started by
individual members after borrowing funds from the HUF were assessable in the HUF's hands,
especially where the HUF is already engaged in the same business. So think twice before letting the
HUF lend any money to its members and viceversa.
 In CIT v. Gopal Bansilal Inani (2000) 245 ITR 2 (SC), the Supreme Court
disallowed the interest paid to coparceners on the loan the HUF had taken from them as a business
expenditure u/s 37(1).
 Can HUF pay remuneration to its Karta? Yes, in Jugal KishoreBaldev Sahai v.
CIT 63 ITR 238 (SC), the Supreme Court held that "if a remuneration is paid to a Karta of the family
under a valid agreement which is bona fide in the interest of and expedient for the business of the
family and the payment is genuine and not excessive, such a remuneration must be held to be an
expenditure laid out wholly and exclusively, for the purpose of the business and must be allowed as an
expenditure under section 10(2)(xv)[corresponding to the present-day Section 37(1)] of the Act".
 There is also the issue of Partition of the HUF. Al though the Mitakshara and other
Hindu laws do not forbid partial partition of the HUF, the Income Tax law frowns upon it. Under the
Hindu law, you may have eliminated the HUF by portioning the property (or whatever assets) of the
HUF, but the taxation authorities have invested themselves with powers u/s 171 of the I T Act to
continue to treat the defunct HUF as an assessee liable to pay tax unless the partition is effected in strict
keeping with the manner laid down in that section. The law wants to dissuade assessees to smash up
their bigger HUFs into smaller ones just to create more files to bring down their tax liabilities. Total
partition in the context of the IT Act means partition by metes and bounds. "Metes and Bounds", an
Anglo-French term, means the boundaries or limits of a tract of land. If the HUF property is physical, it
isn't difficult to divide it up, delineating the share of each member. But a non-physical property will
have to be divvied up amongst the members in such a manner as to comply with Explanation (b) below
Section 171(9). Care must be taken that erstwhile coparceners don't simply end up becoming co-owners
in the property. For example an FD held by the HUF being partitioned can't be converted into a joint FD
of members after partition; if itis, interest on it will continue to be assessed in the HUF's hands. The FD
can continue only in one member's name; he can cough up some cash to the other members to
compensate them for loss of FD.What ametes and bounds partition does is deflate the balloon of
theHUF. 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 is stripped naked of each and every layer of
the clothing of property—-tangible or intangible, movable or immovable--it had. It has to get back into
its birthday suit again to be truly partitioned.
 There is a book titled "Formation & Management of HUF along with Tax
Planning" by authors S R Kharbanda and Prem Nath published by Commercial Law publishers.

HUF HINDU UNDIVIDED FAMILY SHORT QUESTION ANSWER

Q-1.What-is-HUF?
Ans: HUF includes those persons who acquired by birth an interest in joint family property.

Q-2.Dose HUF include the wives and daughters of the above said persons?
Ans: Yes. A family consists of all persons lineally descended from a common ancestor and include their-wives-
and-unmarried-daughters.

Q-3.Does-HUF-arise-from-a-contract?
Ans:No-HUF-arises-only-from-status.

Q-4.Who-is-a-coparcener?

Ans: The persons who acquire by birth and interest in joint family property. The test of Coparcener-is-that-
coparcener-enjoys-right-to-enforce-partition.

Q-5.What-are-the-schools-of-law-under-HUF.
Ans: Daaya bhaga: It prevails only in west Bengal & Assam. Here a son acquires right in the family-
property-not-on-his-birth-but-on-the-death-of-his-father.
Mitaaakshara: Under the school of law each son by birth acquires an equal interest with his father in the
ancestral property. This law prevalent all over India.

Q-6.Can-female-members-can-enforce-partition?

Ans: Female members do not enjoy right to enforce partition, through they are entitled to maintenance-
out-of-the-family-property.

Q-7.What.is.ancestral.property?

Ans: It is the property, which a man inherits from any of his three immediate male ancestors,
i.e.,father,grand.father.and.great.grand.father.

Q-8.Should.there.be.two.male.members?

Ans: There need not be necessarily more than one male member to form a HUF along with female
members.

Q-9.Will.a.joint.undivided.family.be.assessed.as.HUF?

Ans:.Yes.,CIT,v.Smt.Champa,Kumari,Singhi(1972),83.ITR.293(SC).

Q-10.Is.there.HUF.in.Kerala??

Ans:No.

Q-11What.is.a.smaller.HUF?
Ans: A son can have smaller HUF with his wife and children, while he continues to be a member of his
father's HUF. In his father's HUF, he is mere a member, and his own, he is a karta.

Q-12.How.does.HUF.concept.deal.with.females?

Ans:-Women.members.are.not.treatedas.coparcener.of-HUF.
A-daughter-after-her-marriage-has-no-right-at-all-in-assets-of-HUF.After the death of karta, if-there-is-
no-male-member,the-wife-of-karta-not-becomes-a-karta.
If a Karta dies, leaving behind his window and minor son, even then, wife is not permitted to become-a-
karta.

Q-13.Can-there-be-HUF-with-only-female-members?

Ans: Yes. As so long as the property which was originally of the joint Hindu family remains in the hands
of the windows of the member of the family and is not divided, HUF can continue with-female-
members.

Q-14.When-will-HUF-status-be-recognize-under-Income-Tax-Act?

Ans: There-should-be-a-coparcener. 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.

Q-15.
What happens on the death of a sole male member?

Ans:
Even after death, so long as the property which was originally of HUF remains in the hands of widows
and is not divided among them, the joint family continues.

Q-16.
Can individual members be assessed in respect of HUF'S Income?

Ans:
So long as HUF exist, individual members can not be separately assessed in respect of HUF'S income.
ITO v. Bachu Lal Kapoor (1966) 60 ITR 74 (SC).

Q-17.
Can Karta gift HUF property?

Ans:
Gift by katra of HUF, a movable property or an immovable property within reasonable limits in favour of
his daughter is permissible on the occasion of her marriage.

Q-18.
Is oral partition among HUF permissible?

Ans:
Yes Hans Raj Agarwal (2003) 259 ITR 265/126 Taxman 603 (SC).

Q-19.
Can the ITO enquire about details of partition?

Ans:
Yes it is his duty to know the exact portions of the division among the members and to hold an inquiry
into the claim. Lakmichand Bajinath v. CIT (1959) 35 ITR 416 (SC).

Q-20.
Should the partition be recorded by ITO?
Ans:
The partition is not valid and the HUF is assessable to the tax as such, unless the finding is recorded by
the AO by an order under section 171 Addl CIT v. Maharani Raj Laxmi Devi (1997)224 ITR 582/91
Taxman 20 (SC).

Q-21.
Assessees go certain property from HUF but has no son. What is the status?

Ans:
Where the assessees having life, but no child got certain property on partition of bigger HUF, it was held
that assessee's claim for HUF status (smaller HUF) was valid. CIT Krishna kumar (1982) 10 Taxman
292 (MP).

Q-22.
What happens when a single coparcener with no male issue acquire HUF property?

Ans:
The property will belong to him as his separate property and he could validly gift it to his wife and
daughters. CIT v. Admiralty Flats Motel (1982) 133 ITR 895 (MAD)

Q-23.
What happens when karta is a partner in a partnership firm gets salary?

Ans:
Unless the remuneration has direct nexus with investment of funds of the family, it will be Treated as
personal income of katra. Laxman Das v. CIT (1982) 138 ITR 628/(1983) 12 Taxman 58 (all).

Q-24.
What happens when a member who is a partner in a firm gets a salary?

Ans:
It is his individual income. Unless it is the part of the return on investment of HUF. CIT v. Trilok Nath
Mahrotra (1998) 98 Taxman 462 (SC).

Q-25.
What happens when assesse's father settled his self-acquired property in favour of assessee with some
condition?

Ans:
The property is assessable as individual property of assessee even though is subsequent partition of
HUF such property is treated as HUF property. CIT v. CG. Venkatasubben (1999) 150 Taxman 352
(Mad)

Q-26.
What happens when a single coparcener with no male issue acquire HUF property?Can a HUF pay salary
to karta for looking after his affairs?

Ans:
Yes. Provided it is genuine and not excessive and under a valid bona fied agreement . Jugal Kishore
Baleo v. CIT (1967) 63 ITR 238 (SC).

Q-27.
Can a HUF pay salary to karta for looking after its interest in a firm?

Ans:
Yes, CIT v. Prakash chand Agarwal (1982) 11 Taxman 55 (MP)

Q-28.
Who can claim share in partition?
Ans:
All coparceners.
A son in the womb of his mother at the time of partition
Mother.
Wife.

Q-29.
Will section 171 have application on a Hindu family not assessed as HUF so far?

Ans:
No. CIT v. Kantilal Ambalal (1991) 59 Taxman 232 (Guj)

Q-30.
Can partial partition take place in HUF?

Ans:
Partial partition is not recognized under Income tax Act as per section 171(9)

Q-31.
Can a HUF become a partner in a firm?

Ans:
No it can do so only through its katra. CIT v. Seth Govindram sugar Mills (1965) 57 ITR 510 (SC).

Q-32.
Can a widow be a katra of joint family?

Ans:
As the widow is not coparcener, she has no legal qualification to become a katra. CIT v. Seth
Govindram Sugar Mills (1965) 57 ITR 510 (SC)

Q-33.
Can female member blend her property with that HUF?

Ans:
The right of blending is limited to coparcener. Pushpa Devi V. cit (1997) 109itr 730 (sc)

Q-34.
X has obtained property on partition of HUF. He has daughter but no son. Can the property treated as
HUF property?

Ans:
Yes. There is no requirement like that, in HUF, there must be at least two male members.
N.V.Narendranath v. CWT (1969) 74 ITR 190 (SC).

Q-35.
With the gift received from the joint family property can a member from his own HUF?

Ans:
No a gift cannot help in forming or creating a HUF. It may only provide the nucleus of the Properties to
an already existing HUF, Which may not be having any joint Family property Or fund.

Q-36.
Mr. C, an outsider, makes a gift to a HUF consisting of Mr. A and his wife B. Can A&B assessed as a HUF
respect of C's gift?

Ans:
The HUF should have two or more coparceners to treat Mr. gift as HUF property. Hence In this case it is
not possible as A is the only coparcener. (Section 400 of Mulla's Hindu Law)
Q-37.
Mr. A is an assessee in the status of HUF. He has sons and daughters, can he do partition among sons?

Ans:
The father can effect only a total partition in respect o all the properties. He does not have Right to
effect partial partition. CIT v. Seth Gopaldas (HUF) [1979] 116 ITR 577 (MP)

Q-38.
Can a father do total partition without resorting to suit?

Ans:
Yes whereas any other coprcener can achieve this result only by a suit CIT v. Seth Gopaldas (HUF)
[1979] 116 ITR 577 (MP)

Q-39.
Can a female along with her son represent HUF As karta when father is also alive?

Ans:
Only a coparcener can be a manager. Any other senior male member can also manage the affairs. But if
the father is incapable and son is minor. Mother may represent the family for Income Tax Assessment
Sushiladevi rampuriya v. ITO [1960] 38 ITR 316 (cal.)

Q-40.
Mrs. X along with two daughter after her husband's death, wants to form a HUF. What are the views?

Ans:
Not possible. The concept of female forming a joint hindu family agreement appears to be Contrary to
hindu law. CIT v. Smt. Sandhya Rani Dutta [2001] 115 Taxman 369 (SC)

Q-41.
What is the position of the daughter after her marriage?

Ans:
The daughter on her marriage cases to be a member of her father's HUF and becomes a Member of her
Husband's HUF.

Q-42.
Can a adopter son become a coparcener

Ans:
No. birth of male only makes a coparcener. Adopter child can become member.

Q-43.
Can HUF be created through will?

Ans:
Yes Surjitlal chhabara v. CIT [1967] 63 ITR 416 (SC)

Q-44.
Does section 171 of I.T. Act apply to both schools of law?

Ans:
Yes it is applicable to Dayabhaga and Mitakshara school of hindu law. Joint family of Udayan Chinubhai
v. CIT [1967] 63 ITR 416 (SC).

Q-45.
How can properties not capable of physical division be partitioned?

Ans:
It can be done through Book intries K.G. Ramakrishnirer v. CIT [1963] 49 ITR 608 (Mad
Q-46.
Can allotment of share to a person not entitled invalidate partition?

Ans:
No. CIT v. Govind Narain. [1975] 101 ITR 602 (all).

Q-47.
When can a claim partition be made with ITO?

Ans:
It can made before the assessment. Rajmal Paharachand v. CIT [1950] 18 ITR 1 (Punj)

Q-48.
A minor receives share on partition of HUF. What is your advice?

Ans:
Till Minority, the income will be clubbed eith his father's in Income is to be offered in his Individual
assessment. After marriage, he can claim status of HUF with himself & wife. He becomes karta. CIT v.
Parshottamdas K. Panchal [2002] 257 ITR 96/[2003] 123 Taxman 563 (Guj.)

Q-49.
Can a stranger gift a property to HUF?

Ans:
Yes. Provided there is clear declaration that the gift is for the Benefits of HUF. CIT v. Satyendra kumar
[1998] 232 ITR 360 (SC).

Q-50.
Mr. A karta dies in Air crash & compensation is received by sons. Is it HUF income?

Ans:
Insurance compensation is an individual asset and not that of HUF. The interest on this Deposit amount
is not assessable in the hands of HUF but in the hands of sons. L Bansi Dhar & sons v. CIT [1980] 123
ITR 58/4 Taxman 176 (Delhi)

A friend of mine earns income from a number of sources: rent, business and a salary. The other day, she
mentioned she would like her family to get the status of a Hindu Undivided Family. She felt it would help her save
on taxes.
In case this is on your mind as well, we decided to come up with a primer on the HUF.
 Lost your PAN or Form 16?
Interesting insights you must know
It is rather obvious that a non-Hindu family cannot get this status. So, if you are a Parsi, Muslim or  Christian,
tough luck.
So, what is a HUF?
For starters, did you know the term 'Hindu Undivided Family' has not been defined under the Income Tax Act?
It is defined under the Hindu Law as a family that consists of all persons lineally descended from a common
ancestor, including wives and unmarried daughters.
This means your membership into a HUF does not come from a contract but from your status.
A HUF cannot be formed by a group of people who do not constitute a family; lineal descendents with a common
ancestor is a must.
In Maharashtra [ Images ], unlike other states, even married daughters are recognised as HUF members.
Even though Jain and Sikh families are not governed by the Hindu law, they can still be treated as a HUF.
 Are your NSCs maturing
Who are the players in a HUF?
A HUF consists of:
Karta

The karta has to be the oldest male in the family. If he passes away, his wife cannot become the karta. His eldest
son will take his place. If he chooses not to, he can give up his right and the next son in line can take his place.
Coparceners

This is what all the male members are referred to as.

A Hindu coparcenary includes the sons, grandsons and great-grandsons of the holder of the joint family property.
By virtue of their birth, they acquire an interest in the property.
Members
The female members are simply called members.
 Money resolutions for this financial year
Why is it important?
Under the Income Tax Act, a HUF is treated as a separate entity for the purpose of assessment. From this stems
its importance.
However, the income of a joint Hindu family can be assessed as the income of a HUF Hindu only if the following
two conditions are satisfied:
 There should be a coparcenary.
 There should be joint family ancestral property.
Other investments too can take place under the broad head of HUF.
For instance, a HUF can open a bank account in its name. The karta must open a HUF bank account in any bank
by giving an undertaking on a stamp paper of Rs 100. The format will be supplied by the bank.
A demat account to buy shares can also be opened. Even post office deposits and a Public Provident Fund account
can be opened in its name.
 Tax benefits on education fees
Which income is regarded as HUF income?
There are five heads of income:
1.Salary
2.Profits-from-business-or-profession
3.Income-from-house-property
4.Capital-gains
5. Income from other sources
Since the HUF is a separate entity, it can earn income from all the above except income from salary.
All income that arises on the investment of the HUF's funds and utilisation of its assets is regarded as income
and is separately assessed and taxed.
 Will your gift be taxed?
How is it taxed ?
Though the HUF is taxed as separate entity, the tax slab which is applicable to an individual is applicable here
too.
It also enjoys the Rs 1,00,000 deduction under Section 80C.
All the income tax slabs and deductions and exemptions available to individuals are also available to the HUF.
Let's take the case of Anil Shah.
He is a salaried individual but his family runs a business and owns a lot of property. Hence, they formed a HUF.
Anil will be individually taxed on his salary and all the tax breaks and deductions and exemptions will be
applicable to him.
The HUF earns money from the business as well as rent from renting out the properties. The HUF will be taxed
according to the various tax slabs and all the exemptions and deductions will also be available to it.
Let's say after paying the taxes, the HUF has a lot of profit. This profit can be divided to all the members and it
will be totally tax-free in their hands since the tax has already been paid by the HUF.
 2 home? Check the tax impact
Can it be partitioned?
Yes, the HUF can be partitioned.
This is actually a division of property where the share of each member is determined.
Only a male member -- a coparcener -- can enforce a partition. Female members cannot enforce a partition but
are entitled to a share of the division (as per the Hindu law).
The shares are then divided between:
~ All-coparceners
~ A son in the womb of his mother at the time of partition
~ Mother (gets an equal share if there is a partition between the sons and her husband has passed away)
~ Wife (gets a share equal to that of a son at the time of partition between father and sons)
If the karta passes away, the assessing income tax officer should be intimated of his death and the appointment
of the new karta.

What is HUF FAQ on HUF

Q.1 What is the meaning of Hindu Undivided Family?
Ans. Hindu Undivided Family (“HUF”) which is same as joint Hindu family is a body consisting of
persons lineally descendant from a common ancestor, including their wives and unmarried daughters,
who are staying together jointly; joint in food, estate and worship. The daughter, on her marriage,
ceases to be a member of her father’s HUF and becomes a member of her husband’s HUF. You can do
better tax planning with HUF.
Q.2 What is a Hindu Coparcenary? In what ways is it different from a HUF?
Ans. A Hindu Coparcenary is a much narrower body within Hindu Undivided Family. Generally
speaking, it is a body of individuals who acquires interest by birth in the joint family property. They
are the son, grandson and great grandson of the holder of the joint property for the time being. The
coparcenary, therefore, consists of a common male ancestor and his lineal descendants in the male line
within 4 degrees, running from and including such ancestor. No coparcenary can commence without a
common male ancestor though, after his death, it may consist of collaterals such as brothers, uncles,
nephews etc. The essence of coparcenary is community of interest and unity of possession. You
should also see the taxation of HUF, to better know the taxation of HUF.
Q.3 What is the difference between a co-parcener and a member?
Ans. A HUF, as such, can consist of a very large number of members including female members as
well as distant blood relatives in the male line. However, out of this, coparceners are only those males
who are within 4 degrees in lineal descendent from the common male ancestor. The relevance of
concept of coparcenary is that only coparceners can ask for partition. The other male family members;
i.e, other than coparceners in a HUF, have no direct claim over HUF property, but can claim only
through the coparceners.
Q.4     What are the advantages of HUF under Tax Laws?
Ans. The Income-tax Act, 1961 as well as Wealth-tax Act, 1957 recognise HUF as an independent
assessable or taxable entity. This is done by specifically including “Hindu Undivided Family” in the
definition of “person”, in section 2(31) of the Income-tax Act. As such, the income earned by such HUF
will enjoy all exemptions and deductions; including the basic exemption from income-tax, so far as
applicable.
Q.5 How a HUF can be created ? Who can be members of a HUF?
Ans. HUF is a creature of law. It cannot be “created” by act of parties, except in rare cases of adoption
and reunion. Birth of a son in a Hindu joint family automatically makes him a member of the HUF. In
view of this, all male members automatically become members of the HUF. In addition to that, if a
child is adopted, then he also becomes a member of the HUF. Similarly, in case of reunion of
erstwhile HUF family members, such reunited members become members of the reunited HUF.
Moreover, upon marriage, wife becomes a member of her husband’s joint family.
Q.6 Which are the states in which HUF is not recognized?
Ans. Kerala is the State in which the HUF is not recognized. This is done by Kerala Joint Family
System (Abolition) Act, 1975 with effect from 01.12.1976.
Q.7 Is a HUF necessarily resident in India?
Ans. No. Section 6 of the Income-tax Act, 1961 clearly contemplates a situation where a HUF can be
non-resident also. In fact, HUF can also be Not Ordinarily Resident. A HUF will be considered to be
resident in India unless, during the previous year, the control and management of its affairs is
situated wholly outside India. In such a case, it will be treated as non-resident HUF. Moreover, in case
of a HUF whose manager has not been resident in India in nine out of ten previous years preceding the
previous year or has, during the seven previous years preceding that year, been in India for a total 729
days or less, such HUF is to be regarded as Not Ordinarily Resident within the meaning of the Income-
tax Act, 1961. As such, it is not necessary for a HUF to be resident in India.
Q.8 An HUF is having all the properties in India. The Karta of the HUF is residing outside India
permanently and the female members are staying in India and are managing the affairs of the
HUF. What would be the status of such HUF?
Ans. As discussed in the earlier answer, the test is not where the Karta resides, the test is where the
control and management of the affairs of HUF is situated. Even if a part of control and management is
situated in India, such HUF will be treated as resident in India. Though, generally, Karta is supposed to
manage the affairs of HUF, it is not an absolute rule and, by consent, the power of control and
management may be delegated to other members of the family, either fully or partially.
As such, in this case, the status of HUF would be resident in India

Taxation of HUF
Introduction of HUF
The Hindu Undivided Family (HUF) is a special feature of Hindu society. Hindu Undivided Family is
defined as consisting of a common ancestor and all his lineal male descendants together with their
wives and unmarried daughters. Therefore a Hindu Undivided Family consists of males and females.
Daughters born in the family are its members till their marriage and women married into the family
are equally members of the undivided family. On the other hand at any given point of time a
coparcenary is limited to only members in the four degrees of the common male ancestor.
Hindu : In this term are included all the persons who are Hindus by religion. Section 2 of the Hindu
Succession Act, 1956, elaborately declares that it applies to any person, who is a Hindu by religion in
any of its forms or developments, including a Virashaiva, a Lingayat or a follower of Brahmo, Prathana
or Arya Samaj, a Buddist,  Jain or Sikh. In CWT. Smt. Champa Kumari Singh (1972) 83 ITR 720, the
Supreme Court held that the HUF includes Jain Undivided Family.
Hindu Undivided Family (HUF) is a legal expression which has been employed in taxation laws as
a separate taxable entity. It is the same thing as “Joint Hindu Family”. It has not been defined under the
Income Tax Act, as it has a well defined connotation under Hindu Law.
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. Do tax planning with HUF.
How HUF comes into existence :
A Hindu male with his wife and children automatically constitutes the HUF. The HUF is a creature of
Hindu Law. It cannot be created by acts of any party save in so far as by adoption or marriage, a
stranger may be affiliated  as  a  member  thereof.  An  Undivided  Family which is a normal condition
of the Hindu society is ordinarily joint not only in estate but in food and worship. The joint family being
the result of birth, possession of joint property is only an adjunct of the Joint Family and is not
necessary for its constitution.
Basic requirements for the existence of an HUF are as follows :
(i)                Only one co-parcener or member cannot form an HUF Family is a group of people related
by blood or marriage. A single person, male or female, does not constitute a family.
However the property held by a single co-parcener does not lose its character of Joint Family property
solely for the reason that there is no other male or female member at a particular point of time. Once the
co-parcener marries, an HUF comes into existence as he alongwith his wife constitutes a Joint Hindu
Family . as held in the case of  Prem Kumar v. CIT , 121 ITR 347 (All.)
(ii)             Joint Family continues even in the hands of females after the death of sole male member :
Even after the death of the sole male member so long as the original property of the Joint Family
remains in the hands of the widows of the members of the family and the same is not divided amongst
them; the Joint Hindu Family continues to exist. CIT v. Veerapa Chettiar, 76 ITR 467(SC)
(iii)           An HUF need not consist of two male members- evenone male member is enough :
The plea that there must be at least two male members to form an HUF as a taxable entity, has no force.
– Gauli Buddanna v. CIT, 60 ITR 347 (SC); C. Krishna Prasad v. CIT 97 ITR 493 (SC) and Surjit Lal
Chhabda v. CIT, 101 ITR 776 (SC)
A father and his unmarried daughters can also form an HUF, CIT v. Harshavadan Mangladas, 194  ITR
136 (Guj.)
Further on partition of an HUF a family consisting of a co-parcener and female members is to be
assessed in the status of an HUF.
Nucleus of HUF :
It is many times argued that existence of nucleus or joint family property is necessary to recognize the
claim of HUF status in respect of any property or income of an HUF. It has been established now that
since the HUF is a creature of Hindu Law, it can exist even without any nucleus or ancestral joint
family property.
Manager of HUF or Karta :
The person who manages the affairs of the family is known as Karta. Normally the senior most male
member of the family acts as Karta. However a junior male member can also act as Karta with the
consent of the other member. Narendrakumar J. Modi v. Seth Govindram Sugar Mills 57 ITR 510
(SC). However in view of the present social mores and needs of the modern progressive society this
decision of the Supreme Court needs to be revised / reviewed.
Besides the same person can be taxed as both individual and Karta of an HUF . The individual and the
HUF are two different units of taxation i.e. two different assesses CIT v. Rameshwarlal Sanwarmal 82
ITR 628 (SC).
Joint Family Property :
The following types of properties are generally accepted as joint family property :
(i)                Ancestral property;
(ii)             Property allotted on partition;
(iii)           Property acquired with the aid of joint family property;
(iv)           Separate property of a co-parcener blended with or thrown into  a common family hotchpot.
The provisions of sec. 64 (2) of the Income Tax Act, 1961 have superseded the principles of Hindu
Law, in a case where a co-parcener impresses his property with the character of joint family property.
A female member cannot blend her separate property with joint family property but she can make a gift
of it to the HUF. Pushpadevi v. CIT 109 ITR 730 (SC). A female member can also bequeath her
property to the HUF, CIT v. G.D. Mukim, 118 ITR 930 ( P & H ).
Branches of HUF :
An HUF can have several branches or sub-branches . For example, if a person has his wife and sons,
they constitute an HUF. If the sons have wives and children, they also constitute smaller HUFs. If the
grandsons also have wives and children, then even they will also constitute still smaller or sub-branch
HUFs. As stated above, the HUF is a creature of Hindu Law and these entities are HUFs alongwith the
bigger HUF of the father or the grandfather. It is immaterial whether these smaller HUFs possess any
property or not. Property can be acquired by any mode; by partition of bigger HUF or by gifts from any
member of the family or even by a stranger or by will with unequivocal intention of the donor or the
testator that the said gift or bequest will form the joint family property of the donee or the testatee.
An HUF can be composed of a large number of branch families, each of the branch itself being an HUF
and so also the sub-branches of more branches. CIT v. M.M.Khanna 49 ITR 232 (Bom).
Partition of HUF :
Section 171 of the Income Tax Act, 1961 deals with assessment of an HUF, after partition.  Clauses
(a) of the explanation to sec.171 defines “Partition” of an HUF. Where the property admits of a physical
division, then a physical division of the property thereof, but, where the property does not admit of a
physical division then such division as the property admits of, will be deemed to be a “partition”.
`Partition need not be by Metes & bountes, if separate enjoyment can, otherwise the secured and such
division is effective so as to bind the members. Cherandas Waridas, 39 ITR 202 (SC).
However the members of an HUF can live separately and such an act would not automatically amount
to partition of the HUF. Shiv Narain Choudhary v. CWT 108 ITR 104 (All.)
A finding of partition by the assessing officer u/s. 171 of the Income Tax Act, 1961 is necessary.
Partial partition of an HUF has been derecognised by the provisions of sec. 171(9) & moreover,
according to sec. 171(9), any partial partition effected after 31.12.78, is not recognized.
Motive or need for partition cannot be questioned by the Income Tax Department. T. G. Sulakhe v.
CIT, 39 ITR 394 (AP).
I.       Following methods or devices may prove useful in reducing the tax incidence in the case of 
HUF :
(i)                By increasing the number of assessable units through the device of partition of the HUF;
(ii)             By creation of separate taxable units of HUF through will in favour of HUF or gift to HUF;
(iii)           Through family settlement / arrangement;
(iv)           By payment of remuneration to the Karta and other members of the HUF;
(v)             By use of loan from HUF to the members of the HUF;
(vi)           Through gift by HUF to its members specially to the female members;
(vii)        Through other methods / devices;
The aforesaid methods / devices are discussed in detail below as follows :
Partition of HUF
In the case of certain HUFs, the tax liability can be reduced by partition of the HUF. This can be easily
done in a case where the partition results in separate independent taxable units. Suppose an HUF
consists of father and two sons and there are two business establishments, a house property and other
sources of income with the HUF. If the members of  the HUF have no other sources of income then
partition of the HUF can be done by giving one business establishment to each of the sons, house
property to the father and dividing the other sources in such a manner so as to make the partition
equitable. Such a partition of HUF will reduce the tax liability considerably.
The position may, however, be different in a case where the members of the HUF have got high
individual incomes. In such a case it is not advisable to break or partition the HUF. The HUF should be
allowed to continue as a separate taxable unit.
Then there may be a case where the HUF has got only one business establishment which does not admit
of a physical division. For the sake of partition the business may be converted into a partnership firm or
a company. At present, rate of firm’s tax and the rate of tax in case of a company, is 30% flat, therefore
conversion of HUF business into a partnership or a company is not advantageous. The incidence of , in
such a case, can be better reduced by payment of remuneration to the members of the HUF.
Partial partition of HUF is also a very effective device for reducing its tax liability. Partial partition is
recognized under the Hindu Law. However partial partition of an HUF has been de-recognised by the
provisions of sec. 171(9) of the Income Tax Act, 1961 according to which any partial partition effected
after 31.12.78, will not be recognized.
The provisions of sec. 171(9) have been declared ultra-vires by the Madras H.C. in the case of
M.V.Valliappan v. ITO, 170 ITR 238. The Supreme Court has granted S.L.P. and stayed the operation
of the above decision of Madras H.C. as reported in 171 ITR (St.) 52. The Gujrat H.C. has, however,
held the ITAT justified in following the aforesaid decision of Madras H.C., CIT v. M. M. Panchal HUF,
210 ITR 580 (Guj.)
Notwithstanding the provisions of sec. 171(9) partial partition, can still be used as a device for tax
planning in certain cases. An HUF not hitherto assessed as undivided family can still be subjected to
partial partition because it is recognized under the Hindu Law and such partial partition does not require
recognition u/s. 171 of the Income Tax Act,1961. Thus a bigger HUF already assessed as such, can be
partitioned into smaller HUFs and such smaller HUFs may further be partitioned partially before being
assessed as HUFs. Besides any HUF not yet assessed to tax can be partitioned partially and thereafter
assessed to tax.
The following legal aspects in respect of partition of HUF, should also be kept in mind while the
partition of HUF which are as under :-
(i)                Distribution of the assets of an HUF in the course of partition, would not attract any capital
gains tax liability as it does not involve a transfer.
(ii)             On the basis of the same reasoning distribution of assets in the course of partition would not
attract any gift tax liability, and
(iii)           There would be no clubbing of incomes u/s. 64 as it would not involve any direct or indirect
transfer.
(II)     Creation of HUFs as separate taxable units by will in favour of or gift to HUF :
It is now well settled law that there can be a gift or will for the benefit of a Joint Hindu Family . It is
immaterial whether the giver is male or female, whether he or she is a member of the family or an
outsider. What matters is the intention of the donor or testator that the property given is for the benefit
of the family as a whole.
Suppose there is an HUF consisting of Karta, his wife, his two sons, daughter-in-law and grand
children. A gift or will can be made for the benefit of the two smaller HUFs of the sons. The bigger
HUF will continue as a separate taxable unit evenafter the death of the Karta.
There may also be a case where the father or mother has got self acquired properties. They have a son
and his family but there is no ancestral property as a corpus of their family. Then,  father & mother or
both can leave their property for the benefit of their son’s family, through their will (s).
Similar result can be obtained by means of a gift for the benefit of a joint family. It may be pointed out
here that an HUF cannot be created by act of parties but a corpus can be created for an already existing
HUF through the medium of a gift or will etc.
(III) Through Family Settlement / Arrangement :
Family settlements / arrangements are also effective devices for the distribution of ancestral property.
The object of the family settlement should be broadly to settle existing or future disputes regarding
property, amongst the members of the family. The consideration for a family settlement is the
expectation that such settlement will result in establishing or ensuring amity and goodwill amongst the
members of the family. Ram Charan Das v. G.N.Devi, AIR 1966 SC 323 and Krishna Beharilal v.
Gulabchand, AIR 197 SC 1041. Such an agreement is intended to avoid future disputes and to bring
about harmony amongst the members of the family . Sahu Madho Das v. Mukand Ram, AIR 1955 SC
481. Briefly stated though conflict of legal claims, present or future is generally a condition for the
validity of family arrangement, it is not necessarily so. Even bonafide disputes, present or possible in
future, which may not involve legal claims, will also suffice to effect a family arrangement.
As family arrangement does not involve a transfer, there would be no gift and capital gains tax liability
or clubbing u/s. 64.
By a family arrangement tax incidence is considerably reduced or it may even be nil. Suppose a family
consists of Karta, his wife, two sons and their wives and children and its income is Rs. 6,00,000/-. The
tax burden on the family will be quite heavy. If by family arrangement, income yielding property is
settled on the Karta, his wife, his two sons and two daughter-in-law, then the income of each one of
them would be Rs.100,000/- which would attract no tax & if the assessment year is 2007-08, then the
tax liability would be reduced form Rs. 100,000/- to nil.
(IV) By payment of remuneration to the Karta and / or other members of the family :
The other important measure of tax planning for an HUF is to pay remuneration to the Karta and / or
other members of the HUF for services rendered by them to the family business. The remuneration so
paid would be allowed as a deduction from the income of the HUF and thereby tax liability of the HUF
would be reduced, provided the remuneration is reasonable and its payment is bonafide. There is no
legal bar against payment of remuneration to the Karta or other members of HUF for services rendered
to the family in carrying on the business of the family or looking after the interests of the family in a
partnership business. Jugal Kishore Baldeo Sahai v. CIT 63 ITR 238 (SC). The payment must be for
service to the family for commercial or business expediency. Jitmal Bhuramal v. CIT 44 ITR 887(SC).
Remuneration paid to the Karta or other members of the HUF should be under a valid agreement. The
agreement must be valid, bonafide, on behalf of all the members of the HUF and in the interest of and
expedient for the family business. Further the payment must be genuine and not excessive. J. K. B.
Sahai v. CIT, 63 ITR 238 (SC).
Agreement with whom to be entered :
The agreement should be between the Karta and other members of the family. The agreement need not
always be in writing . An agreement to pay salary / remuneration can also be inferred from the conduct
of the parties. CIT v. Raghunandan Saran,  108 ITR 818 (All.). However, it would be better if the
agreement to pay remuneration is reduced in writing.
For A.Y. 2007-08, if the total income of an HUF is Rs. 5,00,000/- then income tax on HUF would be
Rs.1,00,000/-. If salary is paid to four members @ Rs.1,00,000/- net income of HUF would be Rs.
5,00,000  -  Rs.4,00,000 ( 4 x 1,00,000 ) = Rs.1,00,000/-, tax on it would be Rs. NIL. The income of
each member would be Rs.1,00,000/-. Therefore tax on members would be NIL. Thus the tax saving
would be of Rs.1,00,000/-.
The distinction between ordinary and specified HUF’s has been done away w.e.f. 1.4.1997 i.e. A.Y.
1997-98. For Assessment Year 2007-08 the rate of tax on all HUF’s would be the same as in the case of
an individual. This change in the rates of tax has brought a lot of relief to specified HUF’s i.e. the
HUF’s with one or more members having taxable income. After the aforesaid amendment whereby the
concept of specified HUF’s has been done away with, w.e.f. A.Y. 1997-98 this method of tax planning
will be much easier and it will bring more tax relief to the HUF’s.
(V) By loan to the members from the HUF :
If the business, capital or investment of the HUF is expanding then such expansion can be done in the
individual names of the members of HUF by giving loans to the members from the HUF. The HUF may
or may not charge interest on the loans given.
Where property was purchased by members of HUF with loan from the HUF, which was later on repaid
the income from such property would   be  assessable   as   individual   income  of   the   members
L. Bansidhar and Sons v. CIT  123 ITR 58 (Delhi ).
Where after partition of an HUF,  two members became partners in three firms on behalf of their
respective HUFs and they also became partners in a fourth firm, the funds were obtained by means of
loans from other three firms, the share incomes of the members from the fourth firm was assessable as
their individual income only.
CIT v. Champaklal  Dalsukhbhai,  81  ITR  293  (Bom.).
(VI) By gift of movable assets of the HUF to its female members:
The Karta of an HUF cannot gift or alienate HUF property but for legal necessity, for pious purposes or
in favour of female members
of the family. Gift of immovable property within reasonable limits, can be made by a Karta to his wife,
daughter, daughter-in-law or even to a son out of natural love and affection. Gift of immovable property
within reasonable limits can be made only for pious purpose e.g. marriage of a daughter.
Therefore, if the HUF has excess funds or property, then, the Karta can make gift of movable assets to
his wife, daughter or daughter-in-law at one go or over a period of time. However, it may be noted that
with effect from 1.10.98, the applicability of Gift Tax is no more in force. Therefore, no Gift Tax will
be payable by a person making the gift from on or after 1.10.98. However, w.e.f. 1.10.2004 Gift
received from other than relatives exceeds
Rs.25,000/- then that amount is liable to Income Tax u/s. 57 of Income Tax Act, 1961. It may be
remembered that gift for marriage or maintenance of daughter(s) is not liable to Gift Tax. Further
clubbing provisions of sec. 64 would not be applicable if the gift in validly made in accordance with the
rules of Hindu Law. Besides, if a gift made to the minor daughter of the Karta is valid then the
provisions of sec. 60 of the Income Tax Act would not be attracted. CIT v. G. N. Rao, 173  ITR 593
(AP). Whereby, section 60 relates to transfer of income where there is no transfer of assets.
(VII) Through other Methods / Devices :
There are other methods / devices which may be used to reduce the incidence of taxation in the case of
an HUF, e.g. :
(i)                Vesting of individual or self-acquired property in a family hotchpots.
(ii)             Family reunion after partition.
(iii)           Through inheritance by succession – Bequests by Will, now recognized by sec. 30 of Hindu
Succession Act, can also be utilized for tax-planning.
J.       Properties received under a Will :
The status of the property would be the same as is analysed in the case of properties received by way of
gifts as discussed above, that is to say, that the properties will be regarded as the properties of the Hindu
Undivided Family only, if the recipient has a son.
1. K. Properties inherited from an ancestor on the ancestor dying
intestate :
As held by the Supreme Court in the case of CWT v. Chander Sen  (161 ITR 370 )  the person
inheriting the property from his ancestor, even if he has a wife and son would receive the property
absolutely in his own right and his son would not have any interest in that property.
1. L. Unequal Distribution on partition :
The Supreme Court in the case of Commissioner of Gift-Tax v. N. S. Getti Chettiar, 82 ITR 599 held
that there is no liability to Gift Tax if there is an unequal distribution of assets amongst members of the
family on partition.
1. M. Reunion : The conditions for a valid reunion are brought
out in the case of CIT v. A. M. Vaiyapuri Chettiar and another 215 ITR 836
The condition precedent for a valid reunion under the Hindu Law are : (1) There must have been a
previous state of union. Reunion is possible only among the persons who were on an earlier date
members of a Hindu Undivided family ; (2) There must have been a partition in fact ; (3) The Reunion
must be effected by the parties or some of them who had made the partition; and (4) There must be a 
junction of estate and reunion of property because, reunion is not merely an agreement to live together
as tenants in common. Reunion is intended to bring about a fusion in the interest and in the estate
among the divided member of an erstwhile Hindu Undivided Family, so as to restore to them the status
of an HUF once again and therefore, reunion creates a right in all the reuniting coparcener, in the joint
family properties which was the subject matter of partition among them, to the extent they were not
dissipated before the reunion.
The reunion effected by the assessee under the deed of reunion was valid. The entire properties of the
erstwhile joint family prior to the partition would be the properties of the reunited joint family. The
Income Tax Officer might have the option to assess the income arising from the entire properties
belonging to the erstwhile joint family prior to the partition in the hands of the reunited, Hindu
Undivided Family.
Representative of HUF in a Partnership Firm :
An HUF cannot become a partner in a firm. The Karta or a member of the HUF can represent the HUF
in a firm. A female member can also represent HUF in a partnership firm, CIT v. Banaik Industries 119
ITR 282 (Pat.)
Remuneration to Karta or Member from Firm :
Where remuneration was received by a member of HUF from a firm, where he was partner on behalf of
HUF for managing firms business such remuneration was his individual income, CIT v. G. V.
Dhakappa 72 ITR 192 (SC); Premnath v. CIT 78 ITR 319 (SC).
However, income received by a member of HUF from a firm or company is taxable as the income of
the HUF, if it is earned  detriment to or with the aid of family funds, otherwise it is taxable as the
separate income of the member, P.N. Krishna v. CIT 73 ITR 539 (SC).
HUF and Firm :
Members of HUF can constitute Partnership without effecting a partition or without disturbing the
status of joint family. Ratanchand Darbarilal v. CIT 15 ITR 720 (SC). However , on viewing at the
present rate of firms tax, conversion of HUF business into partnership is not advantageous.
The Landmark decisions on the subject of HUF are as follows:
(i)                Krishna Prasad v. CIT, 97 ITR 493 (SC)
On partition between father and sons, the shares which sons obtained on partition of the HUF with their
father, is the ancestral property. As regards his male issues who take interest in the said property on
birth. Therefore one of the sons who was not married at the time of partition will receive the property as
his HUF property, however income therefrom will be taxed as the HUF income from the date of his
marriage.
(ii)             A.G. v. A.R. Arunachalam Chettiar, 34 ITR 421 (PC)
A Mitakshara joint family consisted of father and son. On death of a son the father and the widow of the
son constitute the HUF.
(iii)           Gowli Buddanna v. CIT, 60 ITR 293 (SC)
A Joint family may consist of a single male member with his wife and daughter/ s and it is not
necessary that there should be two male members to constitute a joint family.
(iv)           N.V. Narendranath v. CWT, 74 ITR 190 (SC)
The property received by a coparcener on partition of the HUF is the HUF property in his hands vis-à-
vis the members of his branch i.e. with his wife and a daughter.
(v)             L. Hirday Narain v. ITO, 78 ITR 26 (SC)
After the partition between the father and his sons, the father and his wife constitute a Hindu Undivided
Family which gets enlarged on the birth of a son.
(vi)           CIT v. Veerappa Chettiar, 76 ITR 467 (SC)
Even when a joint family is reduced to female members only it continues to be a HUF.
(vii)        CIT v. Sandhya Rani Dutta, 248 ITR 201 (SC)
Female members cannot create or form an HUF by their acts even under the Dayabhaga School of
Hindu Law.
(viii)      Pushpa Devi v. CIT, 109 ITR 730 (SC)
The right to blend the self-acquired property with HUF property is restricted to a coparcener ( male
member of HUF ) and not available to a female member. However, there is no restriction on a female
member gifting her property to the HUF of her son.
(ix)           Surjit Lal Chhabda v. CIT, 101 ITR 776 (SC)
The property which was thrown into the common hotchpot was not an asset of a pre-existing joint
family of which the assessee was a member. It became an item of joint family property for the first time
when the assessee threw what was his separate property into the common family hotchpots. Therefore,
the property may change its legal incidence on the birth of the son, but until that event happens, the
property, in the eye of Hindu Law, is really the property of the assessee

Got Married; create HUF to save tax & format of deed for creation of HUF
May 5, 2009 in Income Tax by admin
KEY POINTS IN CREATION OF HUF AND FORMAT OF DEED FOR CREATION OF HUF 
 Under the Income Tax Act, an HUF is a separate entity for the purpose of income tax
return.
 The same tax slabs are applicable to HUF as to individual assessee.
 You can not transfer your own assets/money into HUF.
 If you have ancestral property and earning some income from this property, then it is better
to transfer this asset to HUF and save tax up to exemption limit applicable to individual.
 You can transfer the money received on sale of ancestral property /assets into your HUF.
 The income from property of HUF can be further invested in instruments such as shares,
mutual funds, etc. and will be assessed under HUF.
 Existence of property or multiple members is not a pre-requisite to create HUF. A family
which does not own any property may still have the character of Hindu joint family. This jointness is
understood in terms of faith and food. This is because as a Hindu is born as a member of the joint family.
 Any gifts received by the members of HUF (birthday, marriage, etc.) can be treated as assets
of HUF.
 The HUF is taxable as separate person under income tax hence one can save tax from basic
exemption of Rs. 1.5 lakh. HUF will also gain from the tax slab structure of computing income tax.
 Apart from basic exemption of Rs. 1.5 lakh, section 80C deduction up to Rs.1 lakh is also
available.
 For example, if you are in 30% tax bracket, then approx tax saving by creating an HUF will
be as follows:
o Basic exemption up to Rs. 1,50,000 = nil
o Rs. 1,50,000-3,00,000 @10% = Rs. 15,000
o Rs. 3,00,000-5,00,000 @20% = Rs. 20,000
o 80C deductions Rs. 1,00,000
o Therefore total tax payable for HUF on income of Rs. 5,00,000 is only Rs. 35,000.
o If this income of Rs. 5,00,000 is taxed in individual hand @ 30% tax due is Rs.
1,50,000.
o Hence, you can save a total of Rs. 1,15,000 by creating an HUF and transferring
ancestral property income and other income under HUF.
FORMAT OF HUF CREATION DEEDS

FORMAT-I

 
DECLARATION
I, ____________________________ son Of ___________________________________ Residing at
____________________________________________ aged ___Adult do hereby declare-
1. That I am Karta of ____________________________________________
 
1. That I received on behalf of the H U F gift of Rs. ___________ by way of CASH/CHEAUE from
my FATHER ________________________________(name of relative of karta of HUF)   on  dt. _______________
this formed the corpus of the HUF.
 
1. That the HUF at present is consisting of the followings members-
                                    
I)                   Shri _____________________, Adult, Residing at _________________
II)                 Smt. _____________________, Adult, Residing at _________________
III)              Kumari _________________-Minor, Residing at ___________________
 
1. That the above statements are true to the best of my knowledge & belief. Declare this on  
_________________
WITNESS:                                                                              Signature
 
1. ————————————–
                                                                                  ————————————
2. ————————————–                                   (_____________________)
 
—————————————————————————————————-
 
FORMAT- II
 
[To be executed on Rs. 100 Stamp Paper in Maharashtra]
DECLARATION OF GIFT MADE BY ________________________
TO THE HINDU UNDIVIDED FAMILY OF ___________________
I, _____________________________, residing at _______________________
____________________________________________________________, do hereby declare and affirm as
under:
1.       That out of natural love and affection borne by me towards the Hindu Undivided Family of
______________________________,  I have made a gift of Rs.______ (Rupees _________________ only) as per
the following details:
By Cheque No.________, dated __________, drawn on Bank ____________________,  ________________
Branch, in favour of ________________________ HUF.
2.       The above Gift has been duly accepted by ________________________,  as Karta of his Hindu Undivided
Family and has been duly acknowledged hereunder.
3.       This Declaration of Gift is made to record the fact that I have made this Gift in favour of the Donee as
above, who now has the absolute right, title and interest in the gifted amount.
Date: ___________, 200__                                 ___________________
                                                                        (Signature of the Donor)
 
ACKNOWLEDGEMENT OF GIFT
I, ________________________, hereby acknowledge having received the above gift made to my Hindu
Undivided Family by _________________________.
                                                                       
Date: ___________, 200__                                 ___________________
                                                                        (Signature of the Donee
                                                                        as Karta of his HUF)
