How HUF status can save you tax

In 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 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.

[Excerpt from 51 Tips for Saving Income Tax by R. N. Lakhotia, one of India's top taxation experts. Published by Vision Books.]