In Part I of this article we covered such topics as:
What is an HUF,
How does it come into being,
How do we infuse capital into the HUF,
What are rules to be kept in mind when gifting to the HUF, and
What are the deductions and exemptions available to the HUF to save tax.

In Part II, we are going to see what the two schools of Hindu law are that apply to the HUF, go through some more HUF exemptions, see what blending of assets is, look into partial and full partitioning of the HUF and address some more FAQs.
 

Frequently Asked Questions
(Click on the question to go to the answer)

 

1. What are the two schools of Hindu law, from the point of view of the HUF?


2. What are some more deductions / exemptions available to the HUF to save tax?


3. What is blending of assets in an HUF?


4. What is partial partitioning of the HUF?


5. What is full partitioning of the HUF?


6. Can there be an all female HUF?


7. If transferring property by Will, how should one go about it?
    

Let’s get started:

 

1. What are the two schools of Hindu law, from the point of view of the HUF?
   
   There are 2 schools of Hindu law – the Mitakshara school and the Dayabhaga school.
   
   Dayabhaga School
   This school prevails over West Bengal & Assam.
   Under this school, the HUF does not come into existence automatically, until it is brought into existence by the combined decision of the legal heirs of any ancestral property. Here, the system of devolution of property if any, is only by means of a Will, through which the heirs inherit the property.
   As long as the Karta is alive, legal heirs will have no interest in the family property. They only have definite shares after the death of the father. Here, each brother has defined ownership over a particular share, and has the right to transfer his share is he so chooses.
   
   Mitakshara School
   This school prevails over the rest of India.
   Under the Mitakshara school, the thought followed is that the property does not belong to any one member, it vests in the HUF itself. Hence partition can be done within the karta’s lifetime, and is not restricted to after the death of the karta.
   Here, the shares are not defined, they fluctuate with births and deaths of coparceners in the family. When a son is born, he automatically gets entitled to a share of the property.
    
2. What are some more deductions / exemptions available to the HUF to save tax?
   
   Regardless of which school of thought the HUF is ruled by, the following tax saving options are available:
    
   1. If an HUF owns properties which are given out on rent, the standard deduction of 30% is applicable on rental income earned, for maintenance of the properties.
       
   2. As the HUF is a separate tax entity in the eyes of the IT Act, it is entitled to exemption up to Rs. 30 lakhs from wealth tax.
       
   3. This is not directly for the HUF but for the members of the HUF – any sum, for example by way of a gift, received by a member of the HUF, in his capacity as a member of the HUF and not in his individual capacity, will not be taxed in his hands as this would lead to double taxation. It would be taxed in the name of the HUF, which is the taxable entity in this case.
       
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3. What is blending of assets in an HUF?
   
   Blending of assets or property is when a coparcener includes his own assets or property into the assets of the HUF. Blending implies that if partition of the HUF were to take place immediately after the blending, each member would be entitled to only a certain part of the blended asset. In this manner, blending is more beneficial than gifting. This is because after blending of assets, any income that is earned from the asset or property, less his own share, is clubbed in the hands of the donor, whereas in the case of gifting, the entire amount is clubbed.
   
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4. What is partial partitioning of the HUF?
   
   Partitioning is when the HUF status is severed, and the HUF no longer exists. This happens when assets are divided amongst the members of the HUF. There is no longer any joint ownership of these assets. Partial partitioning can be vis-à-vis members i.e. only some members leave the HUF, it can be by way of assets i.e. some assets are divided, or it can be via members and assets both, where some members divide some assets amongst themselves based on mutual consent, and leave the HUF. Only a coparcener can enforce a partition.
   
   However, there is a point to note here. Under the Income Tax Act, partial partition can technically exist. But under Hindu Law, it cannot. The HUF is supposed to be a Hindu Undivided Family, and any act of division will dissolve the entire HUF. Hence under the IT Act, partial partition cannot be considered, taking into view the Hindu Law.
   
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5. What is full partitioning of the HUF?
   
   In full, or total, partition, all the members are no longer members of the HUF, and all the properties are no longer properties of the HUF. All assets and properties are dissolved and distributed and the HUF itself ceases to exist, once all its assets are distributed or its shares are taken.
   
   For recognition of a partition under tax laws, partition of immovable assets i.e. property is necessary to be done by ‘metes and bounds’ i.e. by boundaries and limits (of land).
   
   If a property is immovable i.e. property, or even physical i.e. tangible like jewellery, then division is easier. If a asset is a financial asset, then some care must be taken. The division must happen in such a manner that the members do not end up being co-owners of the asset. For example, suppose one of the assets of the HUF is a Bank FD. In this case, if all the members end up being joint holders in their own shares, of the FD, then technically this asset continues to be an asset of the HUF, hence any interested that accrues on this asset will continue to be taxable income of the HUF. To resolve this issue, a single member will have to claim ownership of the FD and will have to fairly compensate the other members for their share in the FD i.e. he will have to pay them the interest they would have earned, keeping appropriate taxation in mind.
   
   One point to keep in mind is this: Under Hindu Law, you can fully partition your HUF, but under IT Law, you have to take care not to be dissolving your bigger HUF simply to make a number of smaller HUFs to claim that much more tax deduction & exemption. If you do so, the law may frown upon you, and might take action against you as well. However, it is possible to form smaller HUFs within the bigger HUF. So, a son can be the karta in his own HUF, while being a coparcener in his father’s HUF.
   
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6. Can there be an all female HUF?
   
   Yes, there can. Suppose a married couple have only one child, a daughter. In case of the death of the father, the mother and daughter can continue the HUF. There have also been case laws stating that the unmarried daughter of a couple, where the father has passed away, can be the karta of the HUF, until she gets married, if she has no brother.
   
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7. If transferring property by Will, how should one go about it?
   
   If a person wants to transfer some property to a member of the HUF through a Will, this property can instead be transferred to the smaller HUF of the male member of that family. This will save a lot of tax that would otherwise have been paid.
    
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Considering the fabulous tax advantages of having an HUF, it is advisable for every possible person to adopt this means of legally saving taxes. We hope the FAQs given above will address most of your queries. For more specific cases, it is advisable to speak with your CA or a tax expert. But do remember, be sure to make use of the HUF to save on tax!

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gulmarghotel@yahoo.com Jan 06, 2012 I AM THANKFUL TO THE WRITER FOR ADDITION TO MY KNOWLEDGE REGARDING HUF. IT WAS NICE TO READ THE WHOLE ARTICLE. GOPAL AGGARWAL GULMARG HOTEL SHIMLA-171003 094180-53168 098160-53168

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