Taxation of Hindu Undivided Family

  • HUF is treated as a separate entity for the purpose of assessment under Income tax act.
  • HUF does not arise from a contract. HUF is a creation of law. After marriage, as soon as a child is born, HUF comes into existence. HF consist of Father, sons and daughters. Wife is not a part of HUF.
  • Sons, Daughters and the father i.e. Karta are the co-parceners in the joint family and have a right to demand partition. The Karta can give his share in the co- parcenary to his wife.
  • If partition of HUF is made by courts, the courts will always award equal partition. However, the family may mutually effect partition without going to the courts and mutual partition can be unequal.
  • HUF can’t make any gift of HUF property to co-parcener and non-coparceners. Any gifts made by HUF are Void-ab-initio. Therefore, if HUF property is gifted by HUF, such gifts are void-ab-initio. The gifted property shall be included in the wealth of HUF and not the donee.

Capital gains on distribution of assets on partition of HUF

  • Section 47: No capital gains shall arise to HUF on distribution of assets on partition of HUF.
  • Section 49(1): Cost of acquisition of such assets to the member shall be the cost of acquisition of such asset in the hands of HUF.
  • -Period of holding of assets of transferor shall also be considered for computing the period of holding of assets in the hands of transferee.

section 171: Partition of HUF takes place on the date the properties are physically divided. There must be physical division of the properties. Physical division of income without physical division of properties does not amount to Partition.Any remuneration paid by HUF to Karta or a member for services rendered by him in conducting family’s business, is deductible if remuneration is:

  • -Paid under a valid and bona fide agreement;
  • -In the interest of and expedient for the business of family; and
  • -Reasonable and not excessive.

There can be two types of partitions:

  • Total Partition: Where all the properties of the family are divided amongst all the members of the family, and the family ceases to exist as HUF.
  • Partial Partition: IF some members of HUF go out, others remains together, or some property is divided, and balance remains joint. Partial partition is not recognized by Income tax act.

The provisions of computing income of HUF are the same for a normal assessee.

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