Saving taxes has been a concern for many Indian families and one way to do so was by forming a Hindu Undivided Family (HUF). However, the structure is not as attractive as it once was and many families are opting to close their HUFs. But how exactly does one close an HUF with the Income Tax Department in India? In this article, we will explore the tedious process of dissolving an HUF and the necessary steps to follow. So, if you’re planning to close your HUF, keep reading to find out everything you need to know
A. What is Hindu Undivided Family (HUF)?
A Hindu Undivided Family (HUF) is a joint family that is seen as a separate entity from the individual members in the HUF. The head of the family is called Karta who operates the business of the HUF. HUF typically has assets that come from ancestral property, a gift, a property acquired from the sale of joint family property, a will, or property donated to the common pool by members of HUF. The members of HUF include a common ancestor and all his lineal descendants, including their wives and unmarried daughters. The HUF is created by a family only and not by an individual and is automatically created at the time of marriage. Three steps to create HUF are creating a HUF Deed, applying for HUF PAN Card, and opening a bank account of HUF. Once these three steps are followed, the HUF is then a separate legal entity and can start receiving payments. The amounts received in the name of the HUF are not taxed in the hands of the individual members of the HUF. HUF is usually used by families as a means to build assets and save taxes.
B. How does the income tax department treat HUF?
The tax department in India treats Hindu Undivided Family (HUF) as a separate entity. HUF is taxed separately from its members, and it has its own PAN and files a separate tax return. HUF can claim deductions or exemptions allowed under the tax laws separately. All the returns for HUF are filed separately, and it is treated as a separate asset by the income-tax department.
Jain and Sikh families are also considered as HUF under the Income-tax Act 1961, although they are not governed by Hindu Law. With the availability of tax deductions, many tax-paying families use the HUF scheme to save on taxes. However, due to outdated plans, many families are now opting to dissolve the HUF and switch to other tax-saving options.
If you decide to close your HUF, the process can be quite tedious. The HUF is usually led by the eldest male in the family, known as the karta. All family members, including sons, daughters, and grandchildren, are equal inheritors of the property. A deed of partition must be executed for the property to be divided equally among all beneficiaries under the Hindu Succession Act. Once the partition is done, the PAN card can be surrendered by writing to the assessing officer at the income-tax department.
Overall, while HUF can be beneficial for saving on taxes, it is essential to consider other tax-saving options available in India, depending on your specific family situation.
C. Why are families opting to close HUF?
Families in India are increasingly opting to close their Hindu Undivided Family (HUF) due to several reasons. Firstly, HUFs may not be as attractive for tax savings as they once were. While HUFs are taxed separately from their members and can claim deductions and exemptions allowed under tax laws, they also come with their own set of drawbacks such as the inability to sell common property without the consent of all members and the potential for disputes during the partition process.
Secondly, the process of closing an HUF can be complicated and time-consuming. All family members must be part of the deed of partition, and the division of assets must be in line with the Hindu Succession Act. Additionally, there is no recognition of partial partition, so a full partition is required for the dissolution of the HUF.
Finally, families may be looking into other tax-saving options available to them, such as forming a Limited Liability Partnership (LLP) or incorporating their business. While HUFs were once a popular way to save on taxes, families today are exploring other avenues that may offer greater flexibility and benefits.
II. Filing Returns for HUF
A. Applying for a PAN with the income tax department
Applying for a Permanent Account Number (PAN) with the income tax department is the first step for families who wish to open a Hindu Undivided Family (HUF) for tax-saving purposes. A PAN is a 10-digit alphanumeric code issued to every taxpayer in India, including individuals, companies, and HUFs. The process of getting a PAN for an HUF is the same as that for an individual. The HUF can apply for a PAN online through the official website of the Income Tax Department or submit a physical application form to the nearest IT PAN Service center or TIN facilitation center. The application must be accompanied by supporting documents such as proof of identity, proof of address, and proof of date of birth of the karta (the head of the HUF). Once the PAN is issued, the HUF can use it for filing tax returns, opening a bank account, and conducting financial transactions. With the availability of other tax-saving options and the tedious process of dissolving an HUF, many families are now opting to close their HUFs and explore new avenues for tax-saving purposes.
B. Availability of tax deductions
One the benefits of forming a Hindu Undivided Family (HUF) in India is the availability of tax deductions. HUF is taxed separately from its members and can claim deductions or exemptions allowed under the tax laws separately. This means that each family member, as well as the HUF entity itself, can claim deductions under Section 80C, which includes investments in schemes like Public Provident Fund (PPF), Equity Linked Saving Schemes (ELSS), and tax-saving fixed deposits. Moreover, HUF can take an insurance policy on the life of its members, and the premium paid can also be claimed as a deduction. In case of medical expenditure incurred by HUF for any physically disabled member, a deduction of up to Rs. 75,000 or Rs. 1,25,000 (in case of severe disability) can be claimed under Section 80DD. HUF can also claim deductions for certain specified diseases under Section 80DDB. These tax-saving options, along with the separate basic tax exemption of Rs. 2.50 lakhs, make forming a HUF an attractive option for families in India.
C. Treatment of Jain and Sikh families
Jain and Sikh families, although not falling under Hindu law, can still form a Hindu Undivided Family (HUF) and enjoy the tax benefits of this structure. The Income Tax Act of India recognizes Jain and Sikh families as HUFs, granting them the same tax treatment that Hindu families have. This means that they can also form a common ancestor and all of his lineal descendants, including their wives and unmarried daughters, and use this structure to pool in assets and save taxes as a family unit.
Just like with Hindu families, Jain and Sikh families forming HUFs can claim deductions and exemptions under the tax laws, and HUFs have their own PAN and file separate tax returns. However, it is important to note that HUF funds invested in a company or firm may be treated as family income if the member receives fees or remuneration from the company or firm. Also, income from impartible estates, although belonging to the family, is taxed in the hands of the holder of the estate and not in the HUF’s hands. Overall, forming an HUF can be a tax-efficient way for Jain and Sikh families to manage their assets and save taxes in India.
III. Closing HUF
A. Procedure for dissolving HUF
Dissolving a Hindu Undivided Family (HUF) in India requires a few important steps that must be followed diligently. Firstly, the head or ‘karta’, who is usually the eldest male member, must initiate the process by executing a deed of partition. This deed must be signed by all the family members and beneficiaries under the Hindu Succession Act. Secondly, the property must be divided among all the beneficiaries as per the provisions of the Hindu Succession Act. The deed must clearly state all the properties that are part of the HUF and being divided amongst the members. Thirdly, it is important to note that partial partition is not recognized by the Income Tax Act. Therefore, a full partition deed must be drawn up for the dissolution of the HUF. Once the partition is complete, the PAN card can be surrendered by writing to the assessing officer at the Income Tax department. This will terminate the existence of the HUF, and all family members will be required to file individual tax returns.
1. Eldest male as a karta
The Hindu Undivided Family (HUF) is a family structure prevalent in the Indian subcontinent. At the heart of the HUF lies the Karta, who is typically the eldest male member of the family. The Karta bears the responsibility of managing the general affairs of the family and is entrusted with the task of ensuring that the family assets are used judiciously. The other family members, known as coparceners, are entitled to equal shares of the ancestral property that forms the basis of the HUF. The Karta must obtain a Permanent Account Number (PAN) and a bank account in the name of the HUF to reduce the family’s tax liability. Although the idea of an eldest male as the Karta may seem outdated, it has been challenged recently by the Supreme Court of India, which has granted equal rights to daughters over their ancestral property.
2. Division of property through a deed of partition
One way to dissolve a Hindu Undivided Family (HUF) is through the division of property via a deed of partition. This involves the execution of requisite documents such as share transfer forms or conveyance deeds depending on the nature of the assets comprising the HUF property. All family members must be part of the deed which should spell out the properties being divided amongst them in line with the provisions of the Hindu Succession Act. It is important to note that the division of assets must be fair and equitable. For example, if a member wishes to exit the HUF, the share that belongs to them can be given to them. The remaining members can then continue with the HUF with the balance property. This process can be complex, hence it is advisable to take advice from a tax planner or chartered accountant to plan the dissolution of the HUF and to get clarity on respective tax implications. In addition, registering the deed of partition can help eliminate any future disputes or controversy.
3. Inclusion of all family members and beneficiaries under Hindu Succession Act
Under Hindu Undivided Family (HUF), all family members are included in the entity, including beneficiaries under the Hindu Succession Act. This means that the HUF is not just limited to the immediate family members, but also includes extended family members. With the inclusion of all family members, this ensures that every member of the family is taken care of, and that all decisions regarding the HUF are made together. Additionally, beneficiaries under the Hindu Succession Act are also included, which provides assurance that their rights and interests are protected. This is especially significant as it guarantees equal inheritance rights for all members regardless of gender. By having all family members and beneficiaries included under the HUF, families can ensure that everyone is treated fairly and with proper legal protection. With the dissolution of the HUF, it is crucial to consider the interests of all family members and beneficiaries to avoid any legal issues.
B. Requirement of full dissolution of HUF
To completely close an HUF in India, the family must execute a deed of full partition and get it registered with the signatures of all members. A full partition means that all the assets of the HUF are divided among the members, and the HUF ceases to exist. A partial partition or dissolution of the HUF is not recognized under the Income-tax Act. It is important to include all family members and beneficiaries under the Hindu Succession Act in the deed of partition. Once the partition is complete, the family members can write to the assessing officer to surrender the PAN. The process of dissolving the HUF, however, is not as straightforward. It requires the agreement of all members to dissolve the HUF. Dispute among members can lead to a lot of legal troubles. The requirement of full dissolution of HUF is one of the challenges of closing it down. However, it is crucial to complete this process to ensure that the HUF is completely dissolved and no longer under the assessment of the income tax department.
C. Surrendering of PAN card
Once partition of the HUF is complete, the PAN card can be surrendered by writing to the assessing officer at the income-tax department. Surrendering the PAN card is an important step towards officially closing the HUF. However, it is important to note that surrendering the PAN card will not lead to the cancellation of the HUF registration. To fully dissolve the HUF, a family needs to draw up a deed of full partition and get it registered with the signatures of all members. Once the partition of the HUF is done, it will cease to exist.
Surrendering the PAN card is a relatively simple process, but it is important to ensure that all the formalities related to dissolution of HUF are completed before surrendering it to the income-tax department. Families can reach out to the assessing officer for further guidance in case they face any roadblocks while dissolving the HUF. As HUF is no longer the most preferred tax-saving scheme, many families are opting for other options that are more suited to their financial needs.
A. Benefits of closing HUF
While Hindu Undivided Family (HUF) has several benefits, there are also advantages to closing it. Here are some benefits:
1. Transfer of Assets: When a HUF is dissolved, the assets owned by it are distributed among the members based on their share.
2. Tax Savings: Closing HUF also allows individual members to avail tax benefits, especially if they belong to lower tax brackets. The income earned by each member will be taxed separately, which may result in lower tax liabilities for them.
3. Removal of Liability: HUF comes with several legal responsibilities, including tax compliance and legal filings. By closing it, the members can get rid of these added obligations.
4. Simplicity: An individual’s finances are much simpler to manage than the finances of a HUF. They don’t have to worry about the assets owned by the HUF or the distribution of profits or losses.
5. Ease of Inheritance: While the division of assets may seem complicated, it ensures that assets are passed down to legal heirs without any legal disputes or challenges.
Closing a HUF can be a complicated process, and involves several legal obligations. However, it can provide a simpler and more tax-friendly financial environment for individual members.
B. Challenges in closing HUF
While closing a Hindu Undivided Family (HUF) may seem like a good idea for tax-saving purposes, there are a few challenges that families may face. Here are some common challenges when it comes to closing HUF:
1. Tax implications: While closing HUF, all the assets and property must be divided equally among all the family members. This may attract a high tax liability for each individual, making the process challenging.
2. Lack of clarity in documentation: To dissolve an HUF, proper documentation must be executed, including a deed of partition. Lack of clarity in this documentation may lead to legal disputes among family members.
3. Family disagreements: Though HUF property is divided equally among members, there may still be disagreements among family members regarding the distribution of assets. This may cause delays in the process of closing HUF.
4. Impact on succession planning: Closing HUF can impact the inheritance plan for the next generation. As the property is divided among all family members, there may not be enough for one member to inherit an entire business or property.
While closing HUF has its benefits, families must be aware of the challenges involved and weigh the pros and cons before making a decision.
C. Other tax-saving options available to families in India
Apart from closing an Hindu Undivided Family (HUF), there are other tax-saving options available to families in India. These options can help families maximize their tax deductions and minimize their tax liabilities. Here are some of the most popular tax-saving options:
1. Public Provident Fund (PPF): A PPF is a long-term investment option that offers both tax benefits and investment returns. Contributions to a PPF can be claimed as a tax deduction up to Rs.1.5 lakh annually. Moreover, the interest earned is tax-free.
2. National Pension System (NPS): NPS is a retirement savings scheme that allows individuals to save and invest money for their retirement. Contributions to NPS can be claimed as a tax deduction up to Rs.1.5 lakh annually. Additionally, up to 60% of the final corpus is exempt from tax.
3. Equity-Linked Savings Scheme (ELSS): ELSS is a mutual fund scheme that invests in equity and equity-related instruments. Contributions to ELSS can be claimed as a tax deduction up to Rs.1.5 lakh annually. The returns earned are also tax-free.
4. Health insurance: Families can claim a tax deduction up to Rs.25,000 for the premium paid towards health insurance. Additionally, if any of the family members are senior citizens, the deduction limit increases to Rs.50,000.
By taking advantage of these tax-saving options, families can reduce their tax burden and increase their savings.