Law Commission proposes to abolish it Tax saving tool HUF may cease to exist
September, 19th 2018
The concept of Hindu Undivided Family (HUF) may cease to exist if the proposals of a recently released consultation paper on Reform of Family Law by the law commission are accepted.
In 2016, the Ministry of Law and Justice made a reference to the Law Commission of India to examine matters in relation to a uniform civil code. The consultation paper, released in August of 2018, prepared by the law commission discusses the grounds for abolishing the HUF.
Why the need to abolish HUF HUF, meant to be a tool to manage jointly held assets and properties and ease asset inheritance in joint families, is also used as a tax saving tool or a tax break.
According to the Income Tax Department website, in assessment year (AY) 2015-16, there were a total of 9,98,878 tax returns filed by HUFs representing Rs 38,615 crore of gross total income while the total tax payable was of Rs 3,064 crore. "It is evident that the total tax paid viz a viz income declared under HUF regime is less than 10%. Where HUF is abolished and such income is added to the income of the Karta or co-parceners it shall generate a significant increase in the total tax collection for the Government. In case Karta/ coparceners are subject to tax at the maximum marginal rate of 30%, it shall trigger a jump of around 20% in total tax collection for the Government from HUF held assets," says Taranpreet Singh, Partner at TASS Advisors.
The recognition of HUF as a separate tax entity goes back to 1917, which was subsequently incorporated into the Income Tax Act, 1922. The law commission's consultation paper suggests that "The coparcenary be abolished at the Central level and the right in a property by birth be extinguished. As soon as coparcenary is abolished the institution of HUF would inevitably collapse." This proposal gets added muscle now that daughters can become members of the coparcenary by the Hindu Succession (Amendment) Act, 2005
Besides the amendment in 2005, the consultation paper also highlights the loss in tax revenue to the government on account of the existence of HUF. This is how the law commission in the consultation paper concludes, "However, today, when it has been seventy-two 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."
Impact of abolishing HUFs It would be interesting to see the impact of removing the concept of HUF. "Where the proposal to abolish HUF is implemented, it is likely to create a lot of unrest and ambiguity with respect to taxing HUF-held assets and income. One of the key areas of concerns shall be regarding the dissolution of HUF assets and how the distribution of assets shall be taxed. In summary, any abolishment of HUF structure shall complicate the taxation of existing HUF'says Singh.
Here is a look at how the HUF functions and how it is being used as a tax saving tool.
How HUF helps in saving taxes As taxpayers we all look to minimise our tax liability by availing benefits under various sections of the Income Tax Act. Saving taxes through HUF is a valid and lawful thing to do. HUF is treated as a 'person' under section 2(31) of the Income-tax Act and is a separate entity for the purpose of assessment. Personal income of the members is not treated as income of an HUF. HUF has its own PAN and files a separate tax return.
Income, expenses of HUF For an HUF, the income sources are almost similar to individual taxpayers such as profits from business or profession, income from house property, capital gains, income from other sources and so on. Since the HUF is a separate entity, it cannot earn income from salary. Further, all income that arises on the investment of the HUF's funds and utilisation of its assets is regarded as income and is separately assessed and taxed.
On the income earned, the HUF is taxed on the same slab rates applicable to an individual. The HUF is even entitled to avail similar exemption level and deductions like those under sections 80C, 80D etc as that of an individual tax payer. HUF can pay salary to its members if they are contributing to its functioning and work of the joint Hindu family business. This salary expense can be deducted from the income of the HUF. With proper planning, an individual can avail various deductions under personal tax filing and another deductions for an equal amount under HUF tax filing.
Investments by HUF Some investment options used by HUF are bank fixed deposits, mutual funds, insurance etc. In case of mutual funds, the Karta has to add Hindu Undivided Family within brackets after his name to distinguish it from his personal investments. In the case of insurance under HUF, it is allowed only on the life of the Karta. Proposals on the life of co-parceners or members may be allowed only if the Karta is uninsurable. In all such cases, the Karta will be the proposer. If coparceners apply for individual insurance on the basis of income of HUF, it will be treated as separate insurance. Payment of premium will have to be made through HUF funds. The insurance under HUF would belong to and become the assets of the HUF.
However, PPF account in the name of HUF is no more permitted as clarified by the ministry of finance in 2005. To claim deduction under section 80C, an HUF can contribute to the PPF account of its members and claim a tax deduction.