What is Hindu undivided family?

• As per Hindu law, it is a family consisting of all persons lineally descended from a common ancestor, including wives and unmarried daughters.
• HUF cannot be created under a contract but is automatically created in a joint Hindu family with common ancestors and linear descendant.
• There are 3 conditions which need to be fulfilled to meet the HUF criteria:
• Must be Hindu. Jain, Buddhist and Sikh families even though are not governed by the Hindu Law, but they are treated as HUF under the Act.
• There should be a Co-parcenership.
• There should be a joint family property which consists of ancestral property, property acquired with the help of ancestral property and property transferred by its members.
• There should be common ancestor and at least 2 coparceners to recognize HUF under Income tax Act.

1. How is a karta appointed in an HUF?

The eldest adult coparcener (head of the family) of an HUF is known as the karta who is responsible for handling the affairs of the family. He is entrusted with the power of managing all assets and other financial matters. All securities of an HUF are typically in the name of the karta. There is no prescribed formal procedure for appointment of the karta in an HUF.

One the death of a karta, the next senior most member automatically becomes the new karta of the HUF but at times, statutory authorities may require a declaration from the members forming part of the HUF declaring the eldest coparcener as the new karta of the HUF. Further, a declaration from the members forming part of the HUF along with the death certificate of the old karta may be mandated by banks in order to give effect to the change of name of karta in the HUF's bank account. Further, in order to transmit securities in the account of the new karta, a joint application coupled with a set of prescribed documents should be filed with the depository participant.

2. If a karta (a man) passes away can his wife or daughter become karta?

Is it also possible for a wife to be karta if she has a son who is above 18 years of age?

On the demise of a male karta, it is now possible for a daughter to become a karta of the HUF under the circumstance where she is the eldest adult coparcener in the family. The courts have found no restriction in the law preventing the eldest female coparcener of an HUF from being its karta.

However, in case of wife of the deceased karta, the same argument cannot be extended since the wife of the deceased karta is never treated as a coparcener to the HUF. A widow therefore, cannot act as karta of the HUF after the death of her husband. Interestingly, in cases where the surviving male coparceners were minors, the courts took a view that the widow can be a manager of the HUF while distinguishing the position of a manager from that of a karta.

Thus, it would be correct to say that as of today, if a woman, who is not a coparcener (widow or wife of a coparcener) has a son above the age of 18 years, in such a case it is not possible for her to be the karta of the HUF.

3. In February, 2016, Delhi High Court in a landmark verdict said that the eldest female member of the family can be its 'karta' in a HUF.

(a) What are the implications of this?

(b) Will women get more rights in an HUF compared to earlier?

(c) What were the rules earlier? What rights did women have earlier?

1. Implications: The 2016 Delhi High Court verdict serves as an important clarification regarding a woman's status as karta of a HUF. By establishing that daughters can also become karta of the HUF, the verdict is seen to be a significant step forward for women in family matters given the wide arena of discrimination and taboo followed in the classic Indian family. The verdict gives the right balance to the sociological differences between males and females and also serves as an encouragement for change in several other male oriented laws of India.
2. Extent of rights: As a result of this clarification, the scope of rights of females under Section 6 of the Hindu Succession Act has been expanded. Before the verdict, females were recognised only as coparceners and the right of females to become karta of the HUF was barred. However, the court was explicit in holding that there exists no restriction in the law preventing the eldest female coparcener of an HUF to exercise the right of becoming a karta of an HUF.
3. Earlier position: The 2005 amendment to the Hindu Succession Act provided that daughters whether married or unmarried would be recognised as coparceners and would thus be entitled to an equal share in the family property. It was however silent as to a daughter's position as karta. This ruling took the reforms therein to their logical conclusion.

4. How does it impact the Hindu Succession Act, which was amended and gave women equal rights of inheritance?

The court in Sujata Sharma v. Manu Gupta clarified and gave a broader interpretation to Section 6 of the Hindu Succession Act. It was argued that the 2005 Amendment to the Hindu Succession Act only recognized the rights of a female member to inheritance and does not address the issue of management of the HUF estate. The court found the language of amended Section 6 to be clear in extending equal rights to women in terms of both, inheritance and management of the estate. It thereby clarified and expanded the ambit of the amendment to Section 6 in finding "no reason to deny Hindu women coparceners the position of karta".

5. Does a karta has absolute rights over assets of the family?

Can the karta take all the decision on behalf of the family assets even if there is no consensus?

Can the decision taken by a karta be challenged in a court?

A karta has absolute power to manage the family property and as such this power cannot be challenged in a court. However, the dis-satisfied coparcener is always free to demand partition of family property at any point of time.

As far as the power of alienation is concerned, as per Mitakshara law and rulings of various courts, the karta requires consent of all the other coparceners for alienation of the family property unless where:

1. there is a legal necessity (Dev Kishan v. Ram Kishan, AIR 2002 Raj 370), or
2. it is for the benefit of estate (Balmukund v. Kamlavati, AIR 1964 SC 1385).

The karta may also alienate property without consent of the coparceners for the performance of indispensable duties. A decision taken by the karta in these special circumstances cannot normally be challenged in the court. However, where such a challenge is brought before the court, the burden of proof will lie on the Karta to prove that there was in fact presence of legal necessity, benefit of estate or indispensable duties.

Further, if the karta alienates the HUF property for purposes other than the three mentioned above, without taking consent of all the other coparceners, the alienation becomes voidable at the instance of any one of the coparceners.

Even in the recent case of feud over assets in the Grover Family, it can be seen that the power of alienation of the karta has been challenged before the court by alleging that the karta (Mr. Vishal Grover) misused his position to illegally transfer family properties without the consent of the surviving coparceners.

6. What are the role, duties, moral responsibilities and powers of a karta?

The karta plays a fiduciary role in the HUF as he is entrusted with the management of family property and the general welfare of the family. By virtue of being the senior most member of the family the karta is in addition, morally responsible to act in a bona-fide manner in the best interests of the business and the family as a whole.

The karta has the power to manage the joint family business which involves the power to contract debt for family purposes, enter into contracts, refer matters to arbitration, enter into compromises, alienate joint family property, acknowledge debts and represent the business in suits. Concurrent to these powers is the duty, to render accounts, release debts due to the family, operate in a reasonable and judicious manner and take the consent of other coparceners in making important decisions such as starting a new business or alienating coparcenary property.

7. What are the benefits of having an HUF?

• A HUF is assessed as a separate entity for the purpose of assessment under the Act and enjoys the threshold exemption of income of Rs 2.5 lacs and is also taxed at individual slab rates.
• For e.g. If there are 3 members in a family and the income of each family member’s income exceeds Rs 10 lacs. Further the family has a let out ancestral property from which it receives rental income amounting to Rs 10 lacs. Now ignoring any deductions if such income is taxed in hands of any family member it shall be taxed at 30%. However, if such income is shown in hands of HUF then there shall be exemption up to Rs 2.5 lacs I.e., savings of Rs 75,000. Then further for income ranging between 2.5-5 lacs tax rate shall be 5% instead of 30% (I.e., tax savings of 25% amounting to Rs 62,500) if the income would have been taxed in the hands of any family member.
• Just like an individual a HUF can claim gross annual value of self-occupied property as NIL. The HUF is also entitled to claim a deduction for interest on self-occupied house property of Rs. 2,00,000 u/s 24(b) of Income tax act,1961 in a year. The HUF can also let out its property to any person and interest on loan paid deduction can be availed without any limit, in respect of the said property.
• HUF being assessable as separate person under Income tax act ,1961 can avail separate deductions under Section-80C up to Rs 1.5 lacs, Mediclaim for family members under Section-80D up to Rs 25,000 and in case any member is a senior citizen Up to Rs 50,000, u/s 80TTA up to Rs 10,000 and for senior citizens up to Rs 50,000. Therefore, these deductions can be claimed irrespective of the individual deductions of members since two pan cards can be applied and an individual can file two income tax returns, one in his personal/individual capacity and secondly in the name of the HUF.
• Just like an individual a HUF can claim capital gain exemptions under Section 54 and section 54F,54B 54EC of Income tax Act,1961.
• Deductions to HUF are also available in respect of medical treatment of dependent or disabled family members, Deduction U/S 80G in respect of donations can also be claimed by HUF.
• HUF can have a separate DEMAT Account and enjoy tax rate of 15% on Short-term Capital Gains (STT Paid), HUF can also invest in a mutual fund.
• HUF can carry business but not profession but funds should be of HUF and can pay remuneration to Karta and other family members.

8. How to create Corpus For HUF?

• Assets received as gifts by HUF. (relatives or non-relatives). Gift from non-relative should not exceed Rs 50,000.
• Assets passed on by will that favors HUF.
• Assets received on the partition of a larger HUF of which the coparcener was a member (like an HUF in which the coparcener’s father or grandfather was the Karta).
• Common ancestral property
• Property acquired from the sale of joint family property
• It is important here to note that capital infusion should be done taking into account the clubbing provisions under Section-64(2) of Income tax act,1961. This clubbing can be surpassed if the amount transfer in HUF account is invested by Karta in tax free scheme (E.g., tax free bonds). Income earned from tax free bonds being tax free shall not be income and clubbed in hands of transferor u/s 64(2) The tax-free income can then be re-invested to earn even taxable income. It is important to note that clubbing provision is attracted on income and shall be clubbed in hands of transferor but Income on income is out of Clubbing Provision and shall be taxable in hands of HUF and not transferor.

9. Heads of Income For HUF

• Income from House Property
• Income from Other Sources
• Capital Gains
• Profits and Gains of Business or Profession
• Since HUF is an artificial person it cannot earn income from salary.

Let’s understand with an example whatever we have read in the article:

• Rakesh is a salaried person and is drawing a salary of Rs 20,00,000 annually. His income includes income from investments of Rs. 10,00, 000.He also pays LIC Premium of Rs 60,000/- for his family, PPF investment of Rs. 1,00,000/-. His company deducts PF of Rs. 1,50,000/- from his Salary. He also pays medical insurance premium for himself and his family of Rs. 20,000/-.

Scenario I Interest income held in Mr. Rakesh’s name

Scenario II Interest income Transferred in Mr. Rakesh’s HUF name (Piyush sons and HUF)

Revised tax liability of Mr. Rakesh

Tax liability of Mr. Rakesh’s HUF

Tax saving under Scenario II of Rs.2,26,200. 

Illustration- II

Let’s take another example where Mr. Vikash Meena is a salaried employee and has an ancestral property which has been let out and he receives rent from that property amounting to Rs 7,50,000  and he forms HUF. He also pays LIC Premium of Rs 60,000/- for his family, PPF investment of Rs. 1,00,000/-. His company deducts PF of Rs. 1,50,000/- from his Salary.

So, let’s check his liability if this rental income is taxed in individual capacity and HUF.

Scenario I

Scenario II

Revised tax liability of Mr. Vikash Meena

Tax liability of Mr. Vikash Meena’s HUF

 Tax saving under Scenario II of Rs1,57,300