New Delhi: After PM Narendra Modi’s pitch for Uniform Civil Code in Bhopal, All India Majlis-e-Ittehadul Muslimeen (AIMIM) chief Asaduddin Owaisi has demanded abolition of the Hindu Undivided Family provision, citing the tax relief that it provides to the Hindus.
“A tax rebate is given to only the Hindus under the Hindu Undivided Family (HUF) clause by the Income Tax Department. Article 29 — the Right to Culture — is a fundamental right. Does the PM understand this? I don’t think he does,” Owaisi argued.
The comments on the HUF — a concept unique to the Hindu law — come at a time when the deadline for filing income tax returns nears.
Under the Hindu law, a Hindu family is bound together by the fundamental principle of Sapinda or family relationship, descended from common ancestors.
Since 1922 — when a proper system of tax administration was established in India — the HUF has been recognised as a separate legal entity. According to the Income Tax department, the Hindu Undivided Family consists of all persons directly descended from a common ancestor, and also includes the wives and daughters of the male descendants.
“It cannot be created under a contract — it is created automatically in a Hindu family,” the I-T department says.
Under the Hindu law, Sikhs, Buddhists, and Jains could register themselves as HUFs. There are both benefits and pitfalls of registering as a HUF. ThePrint explores the concept of HUF, its wider implication and what it means for taxation purposes.
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Benefits & structure
As mentioned earlier, HUF is treated as a separate entity from its individual members, even having its own Permanent Account Number — the ten-digit unique alphanumeric number issued by the I-T department.
Therefore, individual members of an HUF can take advantage of it being a separate entity while filing tax returns.
For instance, when a person ordinarily inherits property from parents, any money generated from it is added to their personal income and taxed as such. But in case of an HUF, ancestral property can be listed under it, ensuring that it is taxed under the HUF.
This reduces the individual tax burden, especially given that as a separate entity, HUF could take full advantage of all tax exemptions available to an individual.
As a separate legal entity, HUF can make various investment decisions and even avail life insurance policies.
However, there are conditions to being registered as an HUF for tax assessment purposes. The first is that there should be a coparcenership — that is, devolution of ancestral property at birth.
A coparcener is one on whom the right to an ancestral property devolves at birth, and by law, both sons and daughters are coparceners in the HUF with equal rights and liabilities, according to the Hindu Succession Act, 1956.
Since a person’s right to the property devolves at birth, both sons and daughters remain coparceners throughout their life and their children, regardless of their gender, become coparceners too. But spouses are only members of the HUF, not coparceners.
It’s significant that share in a HUF isn’t constant — it varies according to the size of the property and changes not only with every birth but also deaths.
The second condition for tax assessment as an HUF is that “there should be a joint family property which consists of ancestral property, property acquired with the aid of ancestral property and property transferred by its members”, according to the I-T department.
Who heads an HUF?
Within an HUF, the oldest coparcener is marked as the head of the family, or the karta.
Under the Hindu law, kartas are in charge of handling the HUF and all its affairs. This power is almost absolute, and the only recourse open to a dissenting coparcener is to demand partition of the family property.
However, a coparcener who feels that the karta has unilaterally sold or alienated HUF property could also go to court. In such cases, the onus is on the karta to prove that the alienation of property was done either due to a legal necessity, for the benefit of the estate, or in course of their indispensable duties.
‘Indispensable duties’ refer to the performance of duties that are either religious, pious, or charitable.
In the event of the karta’s death, the next oldest coparcener takes the place. A karta is necessarily a coparcener, and spouses cannot occupy that role. However, if the next coparcener is still underage — that is, under 18 — the spouse of the deceased karta can act as a manager of the HUF.
Disadvantages of an HUF
Despite numerous advantages when it comes to tax purposes, there’s a growing debate on abolition of the HUF notion as a tax unit.
In its paper Reform in Family Law, published in 2018, the Law Commission of India argues that the HUF is neither congruent with corporate governance, nor is it conducive for the country’s tax regime.
“In 1936, the Income Tax Enquiry Report had warned of substantive revenue loss if HUF is granted special exemptions. Preferential tax treatment to the HUF has been commented upon by various other committees too in the post-Independence era,” the paper said.
“However, today, when it has been 72 years since Independence, it is high time that it is understood that justifying this institution on the ground of deep-rooted sentiments at the cost of the country’s revenues may not be judicious.”
Although the suggestions were rejected then, calls for its abolition have once again gained ground recently with the debate over the Uniform Civil Code.
One of its major downsides is the nature of the Hindu Undivided Family. Since rights in HUF properties are equal, common, and inalienable, it can’t be done without consensus, often leading to family squabbles.
Another disadvantage is the method of breaking up an HUF — since it never dies and remains in perpetuity, it can only be broken up by partition. This, however, can be done only by consensus and in such cases, assets must be distributed equally between coparceners.
(Edited by Uttara Ramaswamy)
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