Taxation of HUF under the IT Act, 1961

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Taxation of HUF,
under IT Act, 1961
Contents Introduction Ta x R a t e s

Residential Status
Computation of taxable income of HUF Tax implication of Partition of HUF Section 10(2) & 64(2) Bibliography, Sources of Information
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Introduction
Under Section 2(31)(ii) of Income Tax Act, 1961; an HUF is considered a separate Person. The term HUF is not defined under the Act. It is defined by the Hindu Law and governed by the Hindu Succession (Amended) Act, 2005. The Tax slab rates are the same for HUF and male non-senior individual under the Act. The key sections that attract taxation of HUF (exclusive provisions for HUF) are Section 6(2) (residential status), Exemption provision Section 10(2) (Sum received from HUF), Section 56(2)(vii) (sum/property received without/ for inadequate consideration), Section 64(2) (clubbing), Section 140(b) (signing of return of income), Section 171 (de-recognition of partial
partition)

Tax Rates
(For A.Y 12-13)
Net income range Up to Rs. 1,80,000 Rs. 1,80,000 Rs. 5,00,000 Rs. 5,00,000 Rs. 8,00,000 Above Rs. 8,00,000 Income tax rates ++ Nil 10% of [total income minus Rs. 1,80,000] 20% of [total income minus Rs. 5,00,000] plus Rs. 32,000 30% of [total income minus Rs. 8,00,000] plus Rs. 92,000

++ Notes: Surcharge is NIL Education cess is 2% of income tax Secondary & higher secondary education cess is 1% of income tax
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Residential Status Sec. 6(2)

Continued
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How to determine whether HUF is ordinary/nonordinary resident?

From the chart we can say that a resident HUF is either ordinary resident or not ordinary resident. A resident HUF is ordinary resident in India if the Karta or manager of the family satisfies the following two additional condition as laid down by Section 6(6)(b): o He has been resident in India in at least 2 out of 10 previous years immediately preceding relevant previous year and o He has been present in India for a period of 730 days or more during 7 years immediately preceding the previous year Now, based on the residential status the HUF, the scope of its income chargeable to tax can be determined. (Section 5, Section 7, Section 9)
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How to compute taxable income of HUF?

Step 1- First ascertain the income in different heads of income, ignoring incomes exempted under sections 10 to 13A. While computing income one should keep the following points in mind : i. If funds of HUF are invested in a company or a firm, fees or remuneration received by the member as a director or a partner in a company/firm may be treated as income of the family, if fee/remuneration is earned essentially as a result of investment. However, if the fee/remuneration is earned essentially for services rendered by him in personal capacity, it will be treated as personal income of the member. ii. If any remuneration is paid to karta for services rendered by him in conducting family business, it is deductible if it is paid under valid and bona fide agreement in the interest of business of family and is genuine and not excessive.
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 Step 2- The following other points should be noted i. Under Sections 60 to 63, incomes belonging to some other person, may be taxable as income of HUF. For example, if HUF transfers income without transferring asset, such income is taxable under Section 60 in the hands of HUF. Likewise, if an asset is transferred under revocable transfer by the family, its income is taxable in the hands of HUF. ii. Losses of the current year as well as preceding years will be set-off under Sections 70 to 80. iii. From the gross total income, HUF can claim deductions under Sections 80C, 80CCF, 80D, 80DDB, 80G, 80GGA, 80GGC, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID, 80-IE, 80-JJA. iv. If HUF has agricultural income, then all the rules and provisions of Section 10(1) and related are applicable (including the scheme of partial integration).
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Tax implication of partition of HUF

Section 171 of the Act

A partial partition may be partial as regards the persons constituting the joint

family or as regards the properties belonging to the family or both. However, a partial partition is not recognised for tax purpose. Such family shall continue to be assessed as if no partial partition has taken place.
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 Once income of a joint family is assessed as income of HUF, it will continue to

be assessed as such until one or more coparceners claim partition. The Assessing Officer makes an enquiry and records the same. Income of HUF from first day of previous year till date of partition is assessed as income of HUF & thereafter income of property subject to partition is assessed as individual income of recipient member.
If however recipient-member forms another HUF along with his wife or son(s), such income will be chargeable to tax in the hands of new HUF.

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Section 10(2) & 64(2)

Sec. 10(2) - any sum received by an assessee in his capacity as a member of a H.U.F is exempt from tax to avoid double taxation as H.U.F is also assessable separately on its income in its own capacity. The sum should be received in the capacity as a member of an H.U.F Sec. 64(2) It is applicable when a member of HUF converts his property into joint separate property or when the member transfers for inadequate consideration to his HUF. Income from such property shall be clubbed with the transferor. After partition, if the property converted/transferred by a member is subsequently transferred amongst other members, the income derived from such property, as is received by the spouse of the transferor will be clubbed with the income of the transferor.

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Source
1. Taxmann Students guide to Income Tax AY 12-13 V.K Singhania 2. IPCC Study Material

3. http://www.incometaxindia.gov.in/

Presentation created by Harsh Kothari

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