Hindu Undivided Family business is a precise kind of business structure found only in India. This is one of the classical methods of business structure in the nation. It is administered by the Hindu Law. The source of membership in the company is birth in a family and 3 consecutive generations can be members of the company.
The business is managed by the head of the family (eldest member) and he is called Karta. However, all the members hold equal ownership over the property of an ancestor and they are called as co-parceners.Taxation works differently for individuals, companies, firms or other entities. One among such entities is Hindu Undivided Family (hereinafter called HUF). It involves a separate and independent set of tax liabilities and exemptions. HUF as a concept was introduced in India to ensure that families stay together and all the earnings of the business stay within the family, thus, ensuring that the control and wealth of the business remains within the family. It is basically an emotion, that has been given a legal sanctity.
What is HUF?
HUF is not a creation or result of any codified law governing the country; rather it came into existence only by practice and is now treated as a separate legal entity under the Income Tax Act, 1961 (hereinafter called the Act) just like an individual, a firm or a company. It consists of members who have lineally descended from a common ancestor. Individuals become a member in HUF or get rights in an HUF by birth or as a co-parcener or by marriage with the existing member. It works on the eldest first concept.
Karta is the eldest member of the family. Upon retirement or death of the Karta, the eldest child – male or female becomes the next Karta of the HUF without any changes in the HUF. People who are born in the family automatically become co-parceners of the HUF by birth. Also, any woman who is married to any of the member of the HUF becomes the member of the HUF. Woman gain privilege in such concept as they can be members in two HUFs at the same time viz co-parcener in father’s HUF and member in husband’s HUF. However, husbands of female co-parceners do not get any right in the HUF of wives’ parents.
Jain and Sikh families even though not governed by the Hindu Law, are treated as HUF under the Act.
Alike any other business entity, HUF can run its own business to generate income. Also, it can independently make its own investments in mutual funds, shares, precious metals, real estate, etc.
- It refers to a form of business organization which is owned and carried on jointly by the members of the Hindu Undivided Family (HUF).
- It is also known as Hindu Undivided Family Business.
- All members of a Hindu family, including wives, children, daughters-in-law, and grandchildren, can be part of the HUF.
- Within the HUF, male members are called coparceners, and female members are referred to as members.
- Only coparceners have the legal right to request the partition of the HUF, dividing its assets among the members.
- With the amendment in the Hindu Succession Act in 2005, daughters now have equal rights as sons in a HUF. They become coparceners in the HUF from birth, granting them the same privileges and responsibilities as male members. This means that daughters can demand their share of HUF properties just like sons.
Characteristics of Joint Hindu Family Business
Formation
- There should be at least two male members in the family to form a HUF.
- Ancestral property should have been inherited by members of HUF.
- All of the members enjoy this property and have an equal share in that property.
- Thus, any child taking birth in that family becomes a member of the HUF.
- There is no requirement for an agreement to become a member.
Liability
- There is limited liability of all the members or co-parceners in the Hindu Undivided Family business.
- All the co-parceners have equal rights and shares in the property of Hindu Undivided Family business
- The Karta has unlimited liability.
Control
- Karta is the person who has full control over the Hindu Undivided Family business.
- Karta can take advice from all the members but he is not bound to accept their decisions.
Continuity
- After the “Karta” is deceased, the very next eldest member takes up the position of Karta in Hindu Undivided Family business.
- The business can be divided and ended up by the mutual consent of the members.
Minor Members
- The person who has taken birth in Hindu Undivided Family can be a member of the family business.
- Therefore, a minor can also be a member of the family.
Assets of HUF
- Assets received on the partition of a larger HUF of which the coparcener was a member.
- Assets received as gifts by the HUF from friends and relatives.
- Assets received by way of inheritance through a will.
- Individual assets brought in by any member of the HUF to HUF asset pool. However, it won’t be beneficial to the individual member as the tax liability on transfer of asset and income arising thereon will continue to rest in the hands of the member.
Important terms which are used in a Joint Hindu Family Business
(1) Hindu Undivided Family
- The family who runs or carry on the business organization.
- Hindu Undivided Family includes an eldest male member ‘Karta’ and the other male members called co-parceners.
(2) Karta
- He is the person who is the head and eldest member of the family.
- Karta is the person who has full control over business activities.
(3) Ancestral Property
- It is the property of forefather or an ancestor and over which the members have equal right.
(4) Co-parceners
- It consists of propositus and three lineal descendants.
- They have equal ownership rights over the property of an ancestor.
Benefits of HUF
1 Tax Benefits- HUF being an independent legal entity is treated separately from its members and has its separate PAN card, creating a separate stream of income. It enjoys basic tax exemption limit like an individual. A member of an HUF enjoys complete tax exemption on any amount of income received from business done by the HUF as the same is taxable in the hands of the HUF. Moreover, deductions u/s 80C, 80D, 80DD, 80DDB, and 80TTA can be enjoyed by the HUF.
2 Extending Loans- HUF can extend loans to its members as per the terms and conditions agreed upon. Also, it can take a Home Loan to purchase any residential property and avail tax benefits under Section 80C of the Act for loan repayment and the interest to be paid thereon.
3 Investments- Similar to individuals, even HUF can invest in insurance policies and other investment instruments and avail exemptions on payment towards such policies through the year. For instance, an HUF may pay premium on insurance policies for its members and claim benefits for the same. The amount of deductions that can be claimed by HUF independently, being a maximum of Rs. 1.5 Lakhs under Section 80C of the Act.
An HUF is allowed to make investments in Tax Saving Fixed Deposits and Equity Linked Savings Scheme to earn tax benefits under Section 80C of the Act. Although, an HUF cannot hold a PPF Account in its own name, it can avail tax deductions for the amount deposited by the HUF in PPF Accounts of its members on their behalf.
Limitations of a Joint Hindu Family Business
1 Limited Resources
- All the members of Joint Hindu Family Business totally depend upon the ancestral property due to their limited liability.
- Many commercial banks resist extending the credit limit due to the weak financial position of the business.
- Hence, this will result in limited expansion and growth of the business.
2 Unlimited Liability of Karta
- All the important decision regarding management of various business activities are taken by Karta.
- But there is a disadvantage with the Karta that he has unlimited liability.
- Hence, all the business debts are paid by using the personal assets of the Karta.
3 Dominance of Karta
- The Karta takes all the decisions individually and manages the business
- He also involves other members in decision making.
- But Karta is not bound to accept the decisions of the members which may create conflicts between the Karta and the other members.
- Hence, due to clashes in decision making, lack of cooperation between Karta and other members occurs.
4 Limited Managerial Skills
- Sometimes the members suffer due to unfair decisions taken by the Karta in respect of business operations.
- Unfair decisions are taken due to the lack of managerial skills.
- So, the Karta cannot be knowledgeable or proficient in all managerial functions.
- Nowadays, the joint Hindu family business is declining due to the decreasing number of joint Hindu families in the nation.
FAQs
What is a Hindu Undivided Family (HUF)?
A Hindu Undivided Family (HUF) is a legal term used in India to describe a family that jointly owns and manages property and businesses according to Hindu law. It consists of all persons lineally descended from a common ancestor, including their wives and unmarried daughters.
Who can be a member of an HUF?
Any person who is lineally descended from a common ancestor and is part of the Hindu, Sikh, Jain, or Buddhist religion can be a member of an HUF. This includes the common ancestor, his/her sons, daughters, grandsons, granddaughters, and their spouses and unmarried daughters.
What are the key features of an HUF?
- Joint Ownership: All members of the HUF have joint ownership of ancestral property, including the right to use, manage, and dispose of it.
- Hindu Law: HUFs are governed by Hindu law, which includes the Hindu Succession Act and various other legal provisions related to family and property matters.
- Taxation Benefits: HUFs are eligible for certain tax benefits under the Indian Income Tax Act, including separate tax exemptions and deductions.
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