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An HUF is a separate entity that can be created by members of a family, wherein the members are lineal ascendants or descendants. Hindus, Buddhists, Jains and Sikhs can open HUFs.

A single person cannot create an HUF. Usually, the senior-most member of the family is considered the karta, the person who manages the affairs of the HUF.

Once a person gets married, an HUF is automatically created. But to be recorded by tax authorities, it needs to have an income-generating asset, which can only come as a gift from a relative or through a Will for all members of the HUF. Once it has such an asset, the HUF needs to be registered in a particular name and other formalities such as opening a bank account and acquiring a Permanent Account Number (PAN) have to be done.

i. Hindu Undivided Family (‘HUF’) is treated as a ‘person’ under section 2(31) of the Income-tax Act, 1961 (herein after referred to as ‘the Act’). HUF is a separate entity for the purpose of assessment under the Act.

ii. Under Hindu Law, an HUF is a family which consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. An HUF cannot be created under a contract, it is created automatically in a Hindu Family.

iii. Jain and Sikh families even though are not governed by the Hindu Law, but they are treated as HUF under the Act.

Taxability of HUF:-

In order to compute the income of an HUF, one has to first ascertain its income under the different heads of income (ignoring incomes exempted under sections 10 to 13A of the Act). The following points should be keep in mind while computing income:

• If funds of an HUF 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 (if fees or remuneration is earned essentially as a result of investment of funds).

• However, if fees or remuneration is earned for services rendered by the member in his personal capacity, it will be treated as the personal income of the member.

• If any remuneration is paid by the HUF to the karta or any other member for services rendered by him, remuneration is deductible from income of HUF if such payment is genuine and not excessive and paid under a valid and bona fide agreement.

The following incomes are not taxed as income of HUF:-

• If a member has converted or transferred without adequate consideration his self-acquired property into join family property, income from such property is not taxable in hands of the family.

• Income of impartible estate (though it belongs to family) is taxable in the hands of holder of estate and not in hands of HUF.

• Personal income of the members cannot be treated as income of HUF.

• "Stridhan" is absolute property of a woman, hence income arising there from is not taxable as income of HUF.

• Income from individual property of daughter is not taxable in hands of HUF even if such property is vested into HUF by daughter.

1 Deduction from gross total income: An HUF is entitled for deductions available under Chapter VI-A (as applicable) while calculating its taxable income.

2. Rate of Tax:

An HUF is taxed on same slab rates which are applicable to an Individual.

An HUF is liable to pay Alternate Minimum Tax if the tax payable is less than 18.5 percent (including cess and surcharge) of "Adjusted Total Income" subject to prescribed conditions.

After husband's death, can daughter become karta of HUF?

Generally, only the senior-most male member can be the karta of an HUF. In the case of the Commissioner of Income Tax (CIT) v A R Veerappa Chettiar, the Supreme Court in 1970 held that when an existing HUF is reduced to only female members, it can still continue as HUF with one of the females as karta. This is in view of the existence of a potential coparcener by adoption.

A similar view was held by various courts in the past, noting that if the sons are minors, the widow of the deceased karta or a female member of the HUF can act as karta of the HUF and deal with the properties of the HUF.

The Hindu Succession (Amendment) Act, 2005, has done away with the discriminatory treatment meted out to females in the HUF and conferred on them status on par with sons. Hence, logically, in the absence of males in the HUF, a female member can become the karta of the HUF.

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Category Income Tax, Other Articles by - Shubham Gupta