By Ms. Aditi Mukundan
& Mr. Pulkitesh Dutt, Khaitan & Co
Hindu undivided families
(HUFs) in India have been recognised as a separate taxable unit
The concept of a hindu
undivided family (HUF) is unique to India’s legal system. It provides several
opportunities to taxpayers to manage their assets in an efficient manner,
albeit this opportunity comes with its own set of challenges.
HUFs in India have been
recognised as a separate taxable unit, which implies that like any other
taxpayer, an HUF falls under a basic tax slab, is entitled to tax exemptions on
income and liable to pay tax, needs to file tax return, operate accounts
through its karta (head of family) and obtain a PAN, among other compliances.
Traditionally, HUFs were
utilised to structure ownership of assets (mostly ancestral).
 |
| Ms. Aditi Mukundan, Khaitan & Co. |
 |
| Mr.Pulkitesh Dutt, Khaitan & Co |
From a tax perspective,
in most cases, income earned by an HUF would not lead to a tax implication in
the hands of every coparcener or member of an HUF, since such income would be
taxed at the HUF level. Some key considerations while managing an HUF are as
follows.
1. Partition..!
The time and manner of carrying out a
partition is key. A karta may decide to partition the HUF property in order to
relieve tensions among the family members. At times a partial partition
(vis-Ã -vis a person or property) may be effected.
Crystallising each
co -parcener and member’s share in the HUF property must be handled with care.
Additionally, after the
2006 amendment to the Hindu succession laws, whether the children of a daughter
(who is a co- parcener of her father’s HUF) are ‘co-parceners by birth’ in their
maternal HUF is not free from doubt.
Therefore, many families
face a dilemma at the time of partition, whether to include them as a party to
the partition deed or / not. The karta may include them and distribute,
perhaps, a nominal share to them since their consent is recorded in the deed,
preventing disputes on the manner of the partition later.
However, in such a case
they are made privy to the details of the partition and must be agreeable to
the partition. It is important to note that partial partitions are not
recognised for the purposes of tax laws.
Further, stamp duty
implications arising from a partition are dependent on the nature, quantum and
location of the property.
2. Role of karta..!
Management of an HUF’s
funds is entrusted entirely to the karta. The karta has no legal obligation to
take prior consent of each member of the HUF before taking decisions regarding
where and how the funds will be invested &
managed.
Since the other
co-parceners and members of the HUF may request for accounts and details but are
not legally entitled to question the karta’s decisions, as a good practice, the
co- parceners may request the karta to seek investment advice from appointed
persons for better investment strategies to avoid future disputes.
3. Fragmented
ownership..!
At the time of partition, fragmented ownership
of immoveable property should be avoided.
Many a time, selling
immoveable property (usually ancestral property) owned by an HUF can be a
challenge, especially if the partition is acrimonious.
4. Regulatory
approvals..!
Families with businesses that are run through
public listed entities also face certain issues if they have named the HUF as a
‘promoter’. Restructuring assets or a partition of such an HUF can be a tedious
process since necessary dispensations from the SEBI may be required.
Despite the many
challenges associated with their management, HUFs, managed under the guidance
of a professional adviser and the karta, can prove to be a useful tool for
efficiently reducing tax liability of individuals and families as a whole.
About the authors..
The writers Ms. Aditi Mukundan & Mr. Pulkitesh Dutt are senior associate and associate, respectively, Khaitan
& Co.
https://www.linkedin.com/pub/pulkitesh-dutt-tiwari/36/796/547
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