TAXATION OF HINDU UNDIVIDED FAMILY-A TOOL TO

MISUSE THE TAX STRUCTURE -A CRITICAL STUDY &

CASE ANALYSIS.

LAW OF TAXATION

Submitted by: Anamika Singh

Roll No.: 2013021

VII SEMESTER

DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

Visakhapatnam

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 ACKNOWLEDGEMENT

Writing a project is one of the most significant academic challenges, I have ever
faced. Though this project has been presented by me but there are many people who
remained in veil, who gave their all support and helped me to complete this project.

First of all I am very grateful to my subject teacher Mr Vishnu Kumar without the
kind support of whom and help the completion of the project was a herculean task for
me. He donated his valuable time from his busy schedule to help me to complete this
project and suggested me from where and how to collect data.

I am very thankful to the librarian who provided me several books on this topic which
proved beneficial in completing this project.

I acknowledge my friends who gave their valuable and meticulous advice which was
very useful and could not be ignored in writing the project.

Last but not the least, I am very much thankful to my parents and family, who always
stand aside me and helped me a lot in accessing all sorts of resources.

I thank all of them!

Ms Anamika Singh
R. No. 2013021, Semester- VIIth
B.A.L.L.B. (H)

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Table of Contents
ABSTRACT ............................................................................. Error! Bookmark not defined.
INTRODUCTION .................................................................................................................. 7
HUF: A separate legal entity under Indian tax law ................................................................ 9
Tax savings through HUF .................................................................................................... 10
Non-resident HUF ................................................................................................................ 10
Resident but not-ordinarily resident HUF ............................................................................ 10
Formation of a HUF ............................................................................................................. 11
Illustrative Cases .................................................................................................................. 13
CONCLUSION ........................................................................................................................ 20
BIBLIOGRAPHY .................................................................................................................... 21

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 ABSTRACT
DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

NAME OF THE STUDENT-Anamika Singh.

TOPIC OF THE PEOJECT-Taxation of Hindu Undivided family-A tool to misuse the tax
structure -A critical study & Case Analysis.

SEMESTER-VIIth

ROLL NO.-2013021

SUBJECT-Tax Law

RESEARCH METHODOLOGY-The research methodology is doctrinal.

RESEARCH SUBTOPICS-

1. General Introduction
2. HUF: A separate legal entity under Indian tax law
3. Tax savings through HUF
4. Non-resident HUF
5. Resident but not-ordinarily resident HUF
6. Separate Tax Status & Progressive Tax Rates
7. Deductions from gross total income
8. Simultaneous existence of multiple HUF
9. HUF and Hindu Coparcenary
10. Income of HUF and Karta
11. Assets of HUF
12. Tax benefits to HUF
13. Effective tax planning through HUF

LITERATURE REVIEW:-
1. THE LEGAL AND INSTITUTIONAL FRAMEWORK OF TAX
ADMINISTRATION IN DEVELOPING COUNTRIES, Alan D. Liker, Associate
Professor of Law, University of New Mexico, Citation: 14 UCLA L. Rev. 240 1966-
1967
2. TAXATION OF HOUSEHOLDS: A COMPARATIVE STUDY, JOEL S.
NEWMAN, Professor of Law, Wake Forest University School of Law, Citation: 55
St. Louis U. L.J. 129 2010-2011

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HYPOTHEISIS

As regards bank account of a HUF, it should be either in the name of the HUF or in the name
of the Karta of the HUF with a specific declaration that the account is that of the HUF. The
members should also be careful and not deposit their personal funds in the HUF bank account
as only funds belonging to the HUF can be kept in it. Normally, only the Karta is authorized
to sign all cheques and operate the account on behalf of the HUF. However, he may also
authorize any other member of the HUF to operate the same on behalf of the HUF. A person,
who desires to bequeath some property to his son or sons, may also provide a specific
instruction in his will to transfer the assets on his demise to the HUF or his son or sons. This
will result in effective tax savings in the hands of the beneficiary sons.

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 ABSTRACT

Amid all the wide diversity there is a philosophy of underlying unity in India. Yet, at the dawn
of freedom, the founding fathers of our nation chose to continue separate personal laws for
its citizens based on their religious identities. This was despite the fact that the new
constitution embraced secularism. While Hindus continue to be governed by the Hindu laws,
Muslims follow the Mohammedan laws and so on. Personal laws are set of laws relating to
marriage, divorce, guardianship, adoption, maintenance, succession to estate and such other
family related matters.
This paper attempts to understand the unique tax saving opportunity available for Hindus in
the form of Hindu Undivided Family (HUF) concept. Firstly, let us analyze how HUF is a tax
saving tool. Next we will understand certain anti-abuse provisions relating to HUF in the tax
laws due to which certain aspects of HUF vary significantly from the principles under civil
laws. Finally we will identify the actual avenues of tax saving available currently given that
most of the loop holes in the tax laws have been plugged. All references, in this paper, to
tax laws are to be read as Income Tax Act, 1961 and the rules thereof. While under the civil
laws, the term Joint Hindu Family (JHF) is frequently used, the tax laws use the term Hindu
Undivided Family (HUF). In this paper, HUF and JHF are interchangeably used.

HUF as a tax saving tool, under the income tax laws, chiefly stems from the following
advantages it enjoys which are discussed in detail:

1. Separate tax status coupled with progressive tax rates

2. Deductions from gross total income
3. Simultaneous existence of multiple HUFs

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INTRODUCTION

Majority of the population in India belongs to the Hindu community. Hinduism, being an
ancient religion has several old customs and traditions as well as rituals which are being
followed by its members even in present times. The joint family system, where members of
one family lived together under one common roof, including married brothers, their children
and grandchildren, sometimes even extending to five generations, continues even today in
most Hindu families. Under the joint family system, the members share houses, properties,
business, income, wealth, food and their value systems and principles. Therefore, in India, a
joint Hindu family is given a separate legal entity status called Hindu Undivided Family
(HUF) and this status is shared and enjoyed by all members of the family.

The fact remains that every individual is interested to save his tax. Tax saving is possible by
taking advantage of the various provisions contained in the Income-tax Law. Even if a
person were to take full advantage of all the provisions contained in the Income-tax Law
specially relating to deductions and exemptions, then surely he will be able to save
substantial amount of income-tax for his family. Many tax payers resort to illegal activities
to save income-tax but frankly speaking, such illegal activities are not a part of tax planning
process but are a part of tax evasion process which I deprecate always. However, one can go
ahead with legal ways of saving income-tax and this is possible only when we screen very
carefully the provisions contained in the Income-tax Act, 1961 and find out the pointers
which are of advantage looking to our facts and circumstances. One such very important way
of saving income-tax is to think of forming a separate tax entity in the name of a Hindu
Undivided Family. Please note that this is a separate tax entity which is officially recognized
and approved under the Income-tax Law. The creation of Hindu Undivided Family helps the
tax payers to save their taxes in a legal manner. It is a well-known fact that every individual
member of the family specially the adult members of the family would enjoy a tax deduction
up to Rs. 1,00,000 in terms of section 80C of the Income-tax Act, 1961. However, most of
the prudent individuals are able to take the full advantage of the said section 80C of the
Income-tax Act, 1961. For them another vista of saving income-tax lies through the creation
of separate tax entity by the name of Hindu a Undivided Family. Apart from getting tax
deduction up to Rs. 1, 00,000 for an individual, it is possible that if an HUF is created by that
individual, he will be able to claim higher tax deduction and exemptions under the Income-
tax Law because the new tax entity in the form of a Hindu Undivided Family will be eligible
to claim separate tax deduction under section 80C of the Income-tax Act, 1961. Likewise,

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the dividend income and the Long-term Capital Gains on listed securities would also be
exempted for such Hindu Undivided Family. The income from Short-term Capital Gain by
this Hindu Undivided Family will also be eligible to a lower tax rate of 15 per cent tax only.
Various other tax benefits within the framework of the Income-tax Law are available for the
Hindu Undivided Family to save tax. Hence, overall we find that a Hindu Undivided Family
surely is going to bring tons of tax saving for the individual especially because of the
innumerable tax exemptions and deductions which are scattered in the Income-tax Law which
provides these exemptions and deductions to be separately availed to the Hindu Undivided
Family. Hindu Undivided Family is defined as consisting of a common ancestor and all his
lineal male descendants together with their wives and unmarried daughters. Therefore, an
HUF consists of all males & females in the family. Daughters born in the family were its
members till their marriage, but with introduction of Hindu Succession Act, 2005, w.e.f.09-
09-2005, Daughters born in the family are also coparceners even after their marriage. Women
married into the family are members of the HUF. They do not get the status of coparcener,
even as on today.

An HUF is also entitled to claim a separate tax deduction in respect of payment of Health
Insurance Premium. This deduction is permissible under section 80D of the Income-tax Act,
1961. The maximum deduction is up to Rs. 15,000 per annum. However, if the HUF takes
out Mediclaim Policy etc., for members of the family who are senior citizens then the amount
of Rs. 15,000 will be enhanced to Rs. 20,000. Out of this amount up to Rs. 5,000 can also be
included for Preventive Health Check UP. The HUF can further receive a separate tax
deduction of Rs. 50,000 on account of maintenance including medical treatment of a
dependant member which happens to be a person with disability. However, if there is a
severe disability, then the deduction gets enhanced to Rs. 1, 00,000. This deduction is
available as per section 80DD of the Income-tax Act, 1961. If the HUF actually makes
payment on medical treatment of a specific disease or ailments as mentioned in the Income-
tax Act for the benefit of its members, then a deduction up to Rs. 40,000 will be allowed to
the HUF as per section 80DDB of the Income-tax Act, 1961. However, if such expenditure is
made for a member who happens to be a senior citizen, then the deduction to be allowed will
be Rs. 60,000. HUF can also donate to recognised charity trusts and institutions and claim
deduction under section 80G of the Income-tax Act, 1961. The HUF as per section 24 of the
Income-tax Act is also entitled to claim deduction for interest on self-occupied house
property of Rs. 1,50,000 in a year. The income of the HUF from dividend or shares or

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Mutual Funds is fully exempt from income-tax. Likewise, the Long-term Capital Gains on
listed securities received by the HUF is also exempted. Once you have set up a tax entity in
the name of a Hindu Undivided Family, then it is time now for you to think of buying a
residential house property in the name of the HUF by taking loan. The maximum deduction
of interest on the housing loan as we know very well will be Rs. 1, 50, 000 which will be
allowed as a deduction in the name of the HUF. It is even possible that one single house
property may be purchased jointly in the name of the HUF and any member of the HUF in
which situation also the HUF will be entitled to deduction on account of interest on housing
loan up to Rest. 1, 50,000 per annum. Similarly, the members of the HUF separately will
also be entitled to this deduction of Rs. 1, 50,000 on account of interest on loan. If you are a
salaried employee and you receive payment on account of house rent and if by chance your
HUF is the owner of the house property, then it is possible for an individual to make payment
of the rent to the HUF, obtain rent receipt from the HUF and submit the same to the employer
and thereafter get a tax deduction on the HRA amount from the employer. Hence, for all
those persons who receive HRA i.e. House Rent Allowance from their employer, for them it
would be worthwhile to make payment of rent to the HUF and claim a tax deduction from the
salary income by submitting the rent receipt to the employer together with copy of PAN Card
of the person.

HUF: A separate legal entity under Indian tax law

Majority of the population in India belongs to the Hindu community. Hinduism, being an
ancient religion has several old customs and traditions as well as rituals which are being
followed by its members even in present times. The joint family system, where members of
one family lived together under one common roof, including married brothers, their children
and grandchildren, sometimes even extending to five generations, continues even today in
most Hindu families. Under the joint family system, the members share houses, properties,
business, income, wealth, food and their value systems and principles. Therefore, in India, a
joint Hindu family is given a separate legal entity status called Hindu Undivided Family
(HUF) and this status is shared and enjoyed by all members of the family

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Tax savings through HUF

HUF is a good tax saving tool as it is regarded as a separate legal entity under the tax law and
also assessed to tax separately as a distinct legal person. This implies that a person can file
two income tax returns, one in his personal individual capacity and one in the name of his
HUF. This gives the benefits of dividing his taxable income between two entities and hence,
he can claim double deductions and expenses in both capacities, thereby reducing his total
taxable income and tax liability substantially. For e.g. at present, the tax free income in India
is Rs. 200,000 per annum. An individual can thus claim a minimum of Rs. 400,000 as total
exempt tax free income, (Rs. 200,000 in his personal and an equal amount in his HUF return).
In addition to the basic exemption, he can claim other specific exemptions in both capacities
provided under sections 80CCA, 80CCB, 80D, 80DD, 80DDB, 80G, 80GG, 80 GGA and the
rebate under section 88. A HUF also enjoys exemptions under sections 54 and 54F in respect
of capital gains.

Non-resident HUF

What applies to non-resident individuals will also, in some cases, be applicable to a non-
resident HUF. A HUF, whose management and control is exercised wholly outside India
during the financial year. From a tax point of view, if it can be shown that all decisions
concerning the family members and the affairs of the HUF were taken outside India during
the relevant year, that HUF will enjoy all benefits also available to a non-resident individual
and the same tax exemptions

Resident but not-ordinarily resident HUF

A HUF can get a resident but not ordinarily status (RNOR) if the Karta or manger has been a
non-resident in India in nine out of the ten preceding years or has been a resident in India in
two out of the seven preceding years. Thus, where the Karta decides to return to India after
his residence in any country, the HUF will not turn to resident HUF in India straightaway but
it will get the benefit A NOR HUF also enjoys tax advantage in as much as on the return of
the Karta, the HUF is treated as RNOR for the next nine years. The advantage of NOR status
is that all income from property or investments belonging to the HUF outside India will be
exempt from tax in India.

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Formation of a HUF

Typically, a HUF is automatically created. As the name suggests, a HUF means a family of
Hindus. However, under the Indian tax law, persons belonging to the Jain and Sikh religion
can also form HUFs. The existence of a HUF requires at least two members of a family, of
which at least one should be male. A HUF can also consist of the male members and female
members, being their wives and unmarried daughters. Once a member of a HUF receives
any ancestral property from any ancestor three generations above him, a HUF is
automatically created. For example, if a married Hindu male person receives any ancestral
property from his great grandfather, that property will be automatically regarded as his
HUFs property. Another way to form a HUF is by receiving an asset or property by way of
gift from a lineal ascendant with a specific instruction by the donor that the same is being
gifted to the HUF. Although generally, a HUF always exists in a Hindu family, from a tax
point of view, it is created only when it receives assets or any property or is engaged in any
commercial activity. A PAN card may be issued by the Income-tax Department in the name
of a HUF and an account gets created for filing of tax returns.

HUF and Hindu Coparcenary

A joint or undivided Hindu family consists of male members, their wives, unmarried
daughters and widows, if any, of the deceased male members of the family. A Hindu
coparcenary is a smaller body than the HUF as it can only consist of male members of the
family who are entitled to or acquire a right to, by birth, an interest in the joint or coparcenary
property. These are the sons, grandsons and great-grandsons of the holder of the joint
property, that is, the three generations in lineal male descent from the holder. The senior most
member is called the Karta (Manager), who generally manages the joint or coparcenary
property, belonging to all coparceners. . A HUF should consist of at least two male members
but in the event of a partition of the HUF, the smaller family can form a HUF even with a
single male member if it receives a portion of the property.

Income of HUF and Karta

All income arising out of utilisation HUFs properties and from investment of HUFs funds is
income of the HUF and is separately assessed in its hands. One should be careful to declare
only that income to tax in the returns of a HUF which is earned out of the HUF assets or
investments. Any income, which arises out of personal income of a member will be regarded

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as the members individual income and not the income of HUF.A HUF can also contribute
funds or capital in a partnership firm and the share in profits arising to the HUF will be
regarded as income of HUF and will be taxed accordingly in the hands of the Karta or the
representative of the HUF. Therefore, a Karta can be taxed in two capacities, his personal
individual capacity and as Karta, for and on behalf of the HUF. If the partnership firm gives a
certain sum as salary to the Karta or manager for the services rendered by him to the HUF,
such income is taxed in the hands of the Karta in his individual capacity. Since a HUF is a
separate legal entity, it can earn income from several sources such as income from house
property, profits from business, income from capital gains, and income from other sources.
However, a HUF cannot earn income from salaries as salary is earned for personal skills and
services rendered by an individual.

Assets of HUF

A HUF can hold assets such as shares, securities, jewellery, movable and immovable
property. These assets can be either acquired by a HUF by way of a gift which is specifically
instructed to be given to the HUF or it can receive assets on partition of a larger HUF of
which its coparcener was a member and the same is treated as HUF property. Assets can also
be received by a HUF by way of instructions provided in a will where the assets are
instructed to be bequeathed to the HUF. However, after the enforcement of the Hindu
Succession Act in 1956, if there is no will, on the death of a benefactor, the assets cannot
devolve upon a HUF but only on the individual inheritors.

Tax benefits to HUF

As income from sources such as income from house property or income from business or
capital gains can be taxed separately in the hands of a HUF and is not clubbed with the
individuals income, there can be substantial savings in taxes as income is divided between
two entities, that is, the individual and the HUF and expenses and deductions can also be
claimed from both incomes, individual, as well as HUF. Further, if an individual is already
employed with somebody, he can carry out a business and earn income in the name of a HUF
and he can get the benefit of exemptions and deductions from that income too.

Effective tax planning through HUF

An important benefit of creation of HUF is that any income earned by an individual in his
capacity as member of HUF is not taxable in his individual capacity as it is already taxed in

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the hands of the HUF. A HUF, being eligible for all the exemptions and deductions as are
available to an individual, it results in considerable tax savings as the total personal income of
an individual, who is a member of a HUF is divided into his personal capacity and in the
hands of the HUF. Joint assets or properties under inheritance for the entire family can be
gifted to the HUF instead of gifting to individual members of the family. This can result in
tax savings as there is no gift tax or inheritance tax and clubbing of income provisions will
also not apply. Similarly, a Karta of a HUF can give, by way of gifts, certain amounts or
assets out of HUF properties, to its members over a period of time to gradually build assets in
their names. A HUF can also build its capital by way of borrowings from non-members and
the income so earned from investments of the capital will only be HUF income. Individual
members may also transfer their personal funds in a HUF for the purpose of investment in tax
free instruments. Income thus earned from these instruments will be tax free and cannot be
clubbed with the individuals personal income. Such income, if it is reinvested in
instruments, income of which is subject to tax, will also not be clubbed as only the income
earned from transferred amounts is clubbed.

Illustrative Cases

In this context, Hindu means all the persons who are Hindus by religion. Section 2 of the
Hindu Succession Act, 1956, elaborately declares that it applies to any person, who is a
Hindu by religion and it includes a Virashaiva, a Lingayat or a follower of Brahmo, Prathana
or Arya Samaj, a Buddist, Jain or Sikh.

1. In CWT In the case of Smt. Champa Kumari Singh (1972) 83 ITR 7201,

Supreme Court held that the HUF includes Jain Undivided Family. HUF is a separate entity
for taxation under the provisions of sec. 2(31) of the I. T. Act. It means that the one person
can be assessed as an individual and also as a Karta / Chief of his family. HUF Formation
An HUF is automatically constituted with the marriage of a person. No formal action is
required to create an HUF. The HUF being the result of birth, possession of joint property is
only an appendage of the HUF and is not necessary for its constitution. So, one person cannot
form an HUF. Family is a group of people related by blood or marriage. However, the
property held by a single co-parcener does not lose its character of Joint Family property
solely for the reason that there is no other male or female member at a particular point of

1
Champa Kumari Singh (1972) 83 ITR 720

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time. Once the co-parcener marries, an HUF comes into existence as he along with his wife
constitutes a Joint Hindu Family.

2. Prem Kumar v CIT2

It can be noted that, the technical status of an HUF continues even in the hands of females
after the death of sole male member. Even after the death of the sole male member, the
original property of the HUF remains in the hands of the widows of the members of the
family and the same need not divided amongst them. An HUF need not consist of two male
members- even one male member is enough. The understanding that there must be at least
two male members to form an HUF as a taxable entity is not applicable.

3. Gauli Buddanna v. CIT, 60 ITR 347 (SC), C. Krishna Prasad v. CIT 97 ITR 4933

A father and his unmarried daughters can also form an HUF. Nucleus of HUF With several
rulings it is now established that, nucleus or ancestral joint family property is not required for
the existence of the HUF. Karta - He is the person who manages the affairs of the family.
Generally, the senior most male member of the family acts as Karta. However, any other
male member can also act as Karta with the consent of the other member.

4. Modi v. Seth Govindram Sugar Mills)4.

Property - The HUF property may consist of ancestral property, property allotted on partition,
property acquired with the aid of joint family property, separate property of a co-parcener
blended with or thrown into a common family pool. The provisions of sec. 64 (2) of the
Income Tax Act, 1961 have superseded the principles of Hindu Law, in a case where a co-
parcener impresses his property with the character of joint family property. Female members
cannot merge her separate property with joint family property, but she can make a gift of it to
the HUF.

5. Pushpadevi v. CIT5

Female members can also bequeath their property to the Multiple Family Structures - An
HUF can consist of

2
109 ITR 730 (SC)
3
Gauli Buddanna v. CIT, 60 ITR 347 (SC), C. Krishna Prasad v. CIT 97 ITR 493 (SC) and Surjit Lal Chhabda v.
CIT, 101 ITR 776 (SC,
4
Modi v. Seth Govindram Sugar Mills 57 ITR 510 (SC)
5
109 ITR 730 (SC)

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Several branches or sub-branches. For example, a person with his wife and sons constitutes
an HUF. If the sons have wives and children, they also constitute smaller HUFs. If the
grandsons also have wives and children, then they also constitute HUFs. It is irrelevant
whether the smaller HUFs hold any property. Nucleus property can be acquired by partition
of bigger HUF or by gifts from any member of the family or even by a stranger or by will
with intention of the donor or the testator that the said gift or bequest will form the HUF
property of the donee. An HUF can be composed of a large number of branch families, each
of the branch itself being an HUF and so also the sub- branches of more branches.

6. CIT v. M.M.Khanna6 49 ITR 232 (Bom).

Tax planning through HUF -

(i) Increase the number of assessable units through the device of partition of the
HUF.
(ii) Create separate taxable units of HUF through will in favour of HUF or gift to
HUF.

(iii) Enter into family settlement / arrangement.

(iv) Payment of remuneration to the Karta and also to other members. (v)

(v) Providing loans to the members of the HUF.

(vi) Gift to members. Partition of HUF - The tax liability can be reduced by partition
of the HUF. This can be easily done in a case where the partition results in
separate independent taxable units.
Suppose an HUF consists of father and two sons and there are two business establishments, a
house property and other sources of income with the HUF. If the members of the HUF have
no other sources of income then partition of the HUF can be done by giving one business
establishment to each of the sons, house property to the father and dividing the other sources
in such a manner so as to make the partition equitable. Such a partition of HUF will reduce
the tax liability considerably. The position may, however, be different in a case where the
members of the HUF have got high individual incomes. In such a case it is not advisable to

6
49 ITR 232 (Bom)

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break or partition the HUF. The HUF should be allowed to continue as a separate taxable
unit. In case, where the HUF has only one business establishment, which cannot be
physically divided, it may be converted into a partnership firm or a company. At present, rate
of firms tax and the rate of tax in case of a company, is 30% flat, therefore conversion of
HUF business into a partnership or a company is not advantageous. The incidence of, in such
a case, can be better reduced by payment of remuneration to the members of the HUF. Partial
partition of HUF is also a very effective device for reducing its tax liability. Partial partition
is recognized under the Hindu Law. However partial partition of an HUF is no more
recognised by the Income Tax Act. The provisions of sec. 171 partial partitions can still be
used as a device for tax planning in certain cases. An HUF not hitherto assessed as undivided
family can still be subjected to partial partition because it is recognized under the Hindu Law
and such partial partition does not require recognition u/s. 171 of the Income Tax Act, 1961.
Thus a bigger HUF already assessed as such, can be partitioned into smaller HUFs and such
smaller HUFs may further be partitioned partially before being assessed as HUFs. Besides
any HUF not yet assessed to tax can be partitioned partially and thereafter assessed to tax.

Legal aspects and partition of HUF

i) Assets distribution in the course of partition would not attract any capital gains tax.

ii) No gift tax liability.

iii) No clubbing of incomes u/s. 64. Create Separate Taxable Units - It is now well
settled law that there can be a gift or will for the benefit of a Joint Hindu Family .It is
immaterial whether the giver is male or female, whether he or she is a member of the
family or an outsider. What matters is the intention of the donor that the property
given is for the benefit of the family as a whole.
Suppose there is an HUF consisting of Karta, his wife, his two sons, daughter-in-law and
grandchildren. A gift or will can be made for the benefit of the two smaller HUFs of the sons.
The bigger HUF will continue as a separate taxable unit even after the death of the Karta.
There may also be a case where the father or mother has self-acquired properties. They have
a son and his family but there is no ancestral property as a corpus of their family.

Then, father & mother or both can leave their property for the benefit of their sons family,
through their respective wills. Family Settlement / Arrangement - Family settlements /
arrangements are also effective devices for the distribution of ancestral property. The object
of the family settlement should be broadly to settle existing or future disputes regarding

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property, amongst the members of the family. The consideration for a family settlement is the
expectation that such settlement will result in establishing or ensuring amity and goodwill
amongst the members of the family. Since family arrangement does not involve transfer, it
would not attract gift tax, capital gains tax or clubbing. By a family arrangement tax
incidence is considerably reduced or it may even be nil. Suppose a family consists of Karta,
his wife, two sons and their wives and children and its income is Rs. 6, 00,000/-. The tax
burden on the family will be quite heavy. If by family arrangement, income yielding property
is settled on the Karta, his wife, his two sons and two daughter-in-law, then the income of
each one of them would be Rs.100,000/- which would attract no tax & if the assessment year
is 2007-08, then the tax liability would be reduced form Rs. 100,000/- to nil. Remuneration to
the Karta & members - The other important measure of tax planning for an HUF is to pay
remuneration to the Karta and its members for the services rendered by them to the family
business. The remuneration so paid would be allowed as a deduction from the income of the
HUF and thereby tax liability of the HUF would be reduced, provided the remuneration is
reasonable. The payment must be for service to the family for commercial or business
expediency.

7. Jitmal Bhuramal v. CIT7 44 ITR 887(SC).

Loan to the Members - If the business, capital or investment of the HUF is expanding then
such expansion can be done in the individual names of the members of HUF by giving loans
to the members from the HUF. The HUF may or may not charge interest on the loans given.
Where after partition of an HUF, two members became partners in three firms on behalf of
their respective HUFs and they also became partners in a fourth firm, the funds were obtained
by means of loans from other three firms, the share incomes of the members from the fourth
firm was assessable as their individual income only.

8. CIT v. Champaklal Dalsukhbhai8, 81 ITR 293 (Bom.)

Gift of Assets to Members - Generally, the Karta of an HUF cannot gift or alienate HUF
property but he can make certain gifts to the female members. Gift of immovable property
within reasonable limits, can also be made by a Karta to his wife, daughter, daughter-in-law
or even to a son out of natural love and affection. Gift of immovable property within
reasonable limits can be made only for dutiful purpose e.g. marriage of a daughter

7
44 ITR 887(SC)
8
81 ITR 293 (Bom.)

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If the HUF has surplus funds or property, then, the Karta can make gift of movable assets to
his wife, daughter or daughter-in-law at one go or over a period of time. However, it may be
noted that with effect from 1.10.98, the applicability of Gift Tax is no more in force.
Therefore, no Gift Tax will be payable by a person making the gift from on or after 1.10.98.
However, w.e.f. 1.10.2004 Gift received from other than relatives exceeds Rs.25, 000/- then
that amount is liable to Income Tax u/s. 57. It may be remembered that gift for marriage or
maintenance of daughter is not liable to Gift Tax. Further clubbing provisions of sec. 64
would not be applicable if the gift in validly made in accordance with the rules of Hindu Law.
Besides, if a gift made to the minor daughter of the Karta is valid then the provisions of sec.
60 of the Income Tax Act would not be attracted.

9. CIT v. G. N. Rao9,

Whereby, section 60 relates to transfer of income where there is no transfer of assets. Other

Tax Planning

(i) Transfer of individual property to the family. (ii)

(ii) Family reunion after partition.

(iii)Inheritance by succession Partnership Firm & HUF - An HUF cannot become a

partner in a firm. The Karta or a member of the HUF can represent the HUF in a firm.
A female member can also represent HUF in a partnership firm,

10. CIT v. Banaik Industries10

Where remuneration was received by a member of HUF from a firm, where he was partner
on behalf of HUF for managing firms business such remuneration was his individual income,

11. CIT v. G. V. Dhakappa11.

However, income received by a member of HUF from a firm or company is taxable as the
income of the HUF, if it is earned detriment to or with the aid of family funds, otherwise it is
taxable as the separate income of the member,

9
173 ITR 593 (AP).
10
119 ITR 282 (Pat.).
11
72 ITR 192 (SC); Premnath v. CIT 78 ITR 319 (SC)

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 12. P.N. Krishna v. CIT12
Members of HUF can constitute Partnership without affecting a partition or without
disturbing the status of joint family.

13. Ratanchand Darbarilal v. CIT13

However, on viewing at the present rate of firms tax, conversion of HUF business into
partnership is not advantageous.

12
73 ITR 539 (SC).
13
15 ITR 720 (SC).

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CONCLUSION
To conclude, one can say that planning to pay minimum tax by using legal means is a right of
every taxpayer and one must exercise this right to get the optimum results. Once you have set
up a tax entity in the name of a Hindu Undivided Family, then it is time now for you to think
of buying a residential house property in the name of the HUF by taking loan. The maximum
deduction of interest on the housing loan as we know very well will be Rs. 1, 50,000 which
will be allowed as a deduction in the name of the HUF. It is even possible that one single
house property may be purchased jointly in the name of the HUF and any member of the
HUF in which situation also the HUF will be entitled to deduction on account of interest on
housing loan up to Rs. 1, 50,000 per annum. Similarly, the members of the HUF separately
will also be entitled to this deduction of Rest. 1, 50,000 on account of interest on loan. If you
are a salaried employee and you receive payment on account of house rent and if by chance
your HUF is the owner of the house property, then it is possible for an individual to make
payment of the rent to the HUF, obtain rent receipt from the HUF and submit the same to the
employer and thereafter get a tax deduction on the HRA amount from the employer. Hence,
for all those persons who receive HRA i.e. House Rent Allowance from their employer, for
them it would be worthwhile to make payment of rent to the HUF and claim a tax deduction
from the salary income by submitting the rent receipt to the employer together with copy of
PAN Card of the HUF. In case the HUF gives its property on rent to any person, then from
the rental income, the HUF will get deduction in respect of entire interest on loan paid...

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BIBLIOGRAPHY
(1976); Direct Tax Laws-unreported Judgements of G ujarat High Court 1960-74,
Chartered Accountants Association, Ahmedabad.

A Concise Dictionary of Business, Oxford University Press, 1990 P.93, 367.

Agarwal R.K. (1984); Tax Planning for Companies, Hind Law Publisher

Agarwal R.K. (1994); Corporate Taxation, Hind Law Publisher

Agarwal R.K. (1994); Tax Planning In Respect of Salaries, Allowance and

Perquisites, Hind law Publisher.

Agarwal R.K. (1989); Tax Planning for Different Tax Payers, Hind Law Publisher

Aiyar A.N., (1995); India Tax Laws, Company Law Institute

Websites referred :-

http://www.moneycontrol.com/news/tax/how-can-huf-help-individual-to-save-
income-tax_1007010.html?utm_source=ref_article on oct.19 2016 at 5.45pm (IST).

http://www.legalservicesindia.com/article/print.php?art_id=825, accessed on oct.18

2016 at 3.03pm (IST).

http://legal-dictionary.thefreedictionary.com/Tax Law, accessed on oct.17 2016 at

4.00pm (IST).

www.ppgbuffalo.org/wp-content/.../Law of taxation-Users-Guide-1.pdf, accessed on

oct.17, 2016 at 6.00pm (IST).

www.lawteacher.net/PDF/Tax Laws%20Lecture.pdf, accessed on Oct. 18 2016 at

8.30pm (IST).

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