Assessment of HUF with Computation of Tax Liability

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1.  Assessment of HUF (Hindu Undivided Family)

HUF is a separate and a distinct tax entity. The income of a HUF can be assessed in the hands of the HUF alone and not in the hands of any of its members, unless specifically provided by law.

However, any sum received by an individual as a member of a HUF, where such sum has been paid out of the family or income of the impartible estate belonging to the family shall be exempt in the hands of the member of the HUF as per Section 10(2).

Assessment of HUF
Assessment of HUF

The liability of income-tax in case of HUF also depends upon its residential status in India. HUF can be

(a) resident and ordinarily resident in India;

(b) Resident but not ordinarily a resident of India; or

(c) Non-resident in India.

HUF cannot make any gift of HUF property to any coparcener or any other person. Any gifts made by HUF are void-ab-initio.

However, the karta of a HUF has power to gift out of joint family property for certain approved purposes provided that gift amount is reasonable.

Coparceners are only allowed to claim partition of HUF. However, if any partition takes place in HUF, there should be complete partition of HUF. Partial partition of HUF is not recognized by Income Tax and Wealth Tax Act.

On partition of HUF, the mother i.e. wife of karta takes a share equal to the sons and daughter. However, they can mutually decide to take unequal shares. As per section 47 of Income Tax Act, no capital gain shall arise to HUF on distribution of assets on partition of HUF.

2. Computation of Total Income of Hindu Undivided Family (HUF)

Before discussing the steps for computation of total income of HUF, the following points should be considered:

  • As per section 64(2), income from the transfer of a self acquired asset, without adequate consideration or conversion of the same into joint family property, shall not be treated as the income of the HUF. It shall continued to be taxed in the hands of the transferor who is the member of the HUF.
  • Similarly, income from an impartible estate is taxable in the hands of the holder of the estate and not in the hands of the HUF.
  • Any fee or remuneration received by a member of the HUF as a director or a partner in a company or firm which is as a result of the investment made in such concern out of the funds of the HUF, shall be treated as income of the HUF.
    However, if such fee or remuneration is earned by the member as a director or partner for services rendered purely in his personal capacity because of his personal aptitude to the business of the concern, it shall be treated as the income of the individual and not the HUF.
  • If remuneration is paid to the Karta of a HUF or any other member of HUF:
    (a) under a valid agreement which is bona fide
    (b) is in the interest of, and expedient for, the business of the family, and
    (c) the payment is genuine and not excessive,—
    such remuneration paid wholly and exclusively for the business of the family, shall be allowable as an expenditure while computing the income of the HUF and such salary shall be taxable in the hands of karta/member as his individual income
  • As already discussed above, the son is not a coparcener in Dayabhaga School of law. Therefore, if the father does not have a brother as a coparcener, income arising from ancestral property is taxable as his individual income.

3. Steps for Computation of Income-tax of HUF

Step 1: The Gross Total Income of HUF, like any other person, shall be computed under four heads of income, on the basis of their residential status. There can be no income under the head income from salaries in the case of HUF.

Step 2: Sections 60 to 63 relating to income of other person included in the assessee’s total income are applicable in case of HUF but section 64 is not applicable to HUF as it is applicable in case of individual assessee only.

Step 3: Set off of losses is permissible while aggregating the income under different heads of income.

Step 4: Carry forward and set off of losses of past years, if permissible, is allowed.

Step 5: The income computed in steps 1 to 4 is known as gross total income from which the deductions u/ss 80C, 80D, 80DD, 80DDB, 80G, 80GGA, 80GGC, 80-IA, 80-IB, 80-IBA, 80-IC, 80- ID, 80-IE, 80JJA, 80JJAA, 80TTA will be allowed.

Step 6: The balance income after allowing the deductions is known as Total income which will be rounded off to the nearest `10.

Step 7: Compute the tax on such total income at the prescribed rates of tax i.e. at special rates and normal slab rates.

Step 8: Add surcharge @ 10% on total income exceeding `50,00,000 and upto `1 crore and 15% of such income tax in case of a person having a total income exceeding ` 1 crore.

Step 9: Education cess @ 2% plus SHEC @ 1% on the tax plus surcharge if any, shall be levied.

Step 10: Deduct the TDS, advance tax paid for the relevant assessment year and double taxation relief under section 90, 90A or 91. The balance is the net tax payable which will be rounded off to nearest `10 and must be paid as self-assessment tax before submitting the return of income.

4. Assessment after Partition of a Hindu Undivided Family (HUF) [Section 171]

(1) Partition of HUF

A HUF can be partitioned both as regards to persons and as regards to property. This partition can be of two types:

(a)           Total or complete partition;

(b)          Partial partition.

(A) Total/Complete partition:

Where all the properties of the family are divided amongst all the constituents of the family, and the family ceases to exist as an undivided family, it is known as a total or complete partition.

(B) Partial partition:

On the other hand, if some of the constituents of the HUF go out of the fold, others remaining joint, or some of the properties are divided and balance remain joint, it is known as partial partition.

Partial partitions after 31.12.1978 are not recognised for tax purposes.

Persons entitled to claim partition:

Partition can only be claimed by a coparcener. But, when there is a partition of HUF the following persons are entitled to a share in the assets of the HUF:

(i)            All coparceners.

(ii)           Mother is entitled to a share equal to the share of a son in case of death of the father.

(iii)          Wife gets a share equal to that of a son if a partition takes place between her husband and his sons. She enjoys this share separately even from her husband.

(iv)          A son in the womb of the mother at the time of the partition.

(2) Assessment after Partition of HUF

(i)            A Hindu family hitherto assessed as undivided shall be deemed for the purposes of this Act to continue to be a Hindu undivided family, except where and in so far as the partition has been recognised by the Assessing Officer under this section.

(ii)           Where, at the time of making an assessment under section 143 or section 144, it is claimed by or on behalf of any member of a Hindu family assessed as undivided that a total partition has taken place among the members of such family, the Assessing Officer shall make an inquiry there into after giving notice of the inquiry to all the members of the family.

(iii)          On the completion of the inquiry, the Assessing Officer shall record a finding as to whether there has been total partition of the joint family property, and, if there has been such a partition, the date on which it has taken place.

(iv)          Order under section 171 passed by the Assessing Officer after issuing a call memo only to Karta of the HUF and not other members of the family did not comply with the mandatory requirement of section 171(2), and therefore, illegal and not valid. Matter remanded back to the Assessing Officer with the direction to pass an order under section 171 after notifying all the members of HUF and hearing them.

(v)           Where a finding of total partition has been recorded by the Assessing Officer under this section, and the partition took place during the previous year

  1. the total income of the joint family in respect of the period up to the date of partition shall be assessed as if no partition had taken place; and
  2. each member or group of members shall, in addition to any tax for which he or it may be separately liable and notwithstanding anything contained in clause (2) of section 10, be jointly and severally liable for the tax on the income so assessed.

(vi)          Where the finding of total partition has been recorded by the Assessing Officer under the section, and the partition took place after the expiry of the previous year, the total income of the previous year of the joint family shall be assessed as if no partition had taken place; and each member of group of members shall be jointly and severally liable for the tax on the income so assessed.

(vii)        Notwithstanding anything contained in this section, if the Assessing Officer finds after completion of the assessment of a Hindu undivided family, that the family has already effected a partition, whether total or partial, the Assessing Officer shall proceed to recover the tax from every person who was a member of the family before the partition, and every such person shall be jointly and severally liable for the tax on the income so assessed.

(viii)       For the purposes of this section, the several liability of any member or group of members thereunder shall be computed according to the portion of the joint family property allotted to him or it at the partition, whether total or partial.

(ix)          The provisions of this section shall, so far as may be, apply in relation to the levy and collection of any penalty, interest, fine or other sum in respect of any period up to the date of the partition, whether total or partial, of a Hindu undivided family as they apply in relation to the levy and collection of tax in respect of any such period.

5. Income Tax Slab Rate for ‘HUF for Financial Year 2020-21 (AY 2021-22) opting for OLD Tax Regime:

Net Income RangeIncome-Tax RatesSurchargeHealth and Education Cess (HEC)
Up to Rs. 2,50,000NilNilNil
Rs. 2,50,001 — Rs. 5,00,0005% of (total income minus Rs. 2,50,000)Nil4%
Rs. 5,00,001— Rs. 10,00,00020% of (total income minus Rs. 5,00,000)Nil4%
Above 
Rs. 10,00,000
30% of (total income minus Rs. 10,00,000)Nil4%

Plus:

Surcharge: – 

10% of income tax where total income exceeds Rs. 50 Lakh.

15% of income tax where total income exceeds Rs. 1 Crore.

25% of income tax where total income exceeds Rs. 2 Crore.

37% of income tax where total income exceeds Rs. 5 Crore.

Health and Education Cess (HEC) : – 

4% of Income Tax and Surcharge.

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