Where does the money or assets come from in an HUF (Hindu Undivided Family)? How do those who give money to the HUF benefit? Are income tax rates applicable to HUFs different from those applicable to individuals? The term karta is used when explaining the benefits of forming an HUF. Does the HUF get dissolved when the karta retires or can continue to exist? What legal responsibilities does the karta have towards the coparceners and why is he crucial to the HUF?
Any undivided ancestral property can form part of the HUF. Additionally, any coparcener or member of an HUF may mix his personal property with the overall HUF property. However, due to clubbing provisions under the Indian income tax laws, income earned from such properties, which are mixed with the HUF properties, would continue to be taxed in the hands of the transferor.
The tax rates applicable to HUFs is the same as that for an individual.
Typically, HUFs with lesser income benefit to some extent because the karta and the coparceners can avail the basic income tax slab rate benefits in their individual capacities, and the HUF would also be entitled to the same tax slab benefit on the income it earns on its assets.
In relation to the dissolution of the HUF, an HUF will continue to exist even after the demise of the karta—an HUF can be perpetual, unless wound up. The next eldest male coparcener of the HUF would automatically become the next karta. If all the coparceners decide to dissolve the HUF, it may be done so by way of partition of the assets owned by the HUF. Each coparcener would be entitled to a particular share in the HUF, according to the provisions stated in the Hindu Succession Act, 1956.
Further, please note that it is also permissible to divide the HUF assets in an unequal manner (if it is so agreed upon by all the coparceners).
The karta, being the custodian of the HUF’s income and assets, manages the HUF property. Some of the karta’s duties include the duty to render accounts in relation to the HUF’s income and expenses to the coparceners, realize any debt owed to the HUF, incur expenses which would reasonably benefit the HUF, the duty not to alienate any HUF property unless he has a legal obligation or requirement to do so or unless such alienation would benefit the HUF, among others.
In general, the role of the karta is crucial for the HUF. He is entrusted with the management of not only the assets owned by the HUF but also with the general welfare of the family.
If you are thinking of forming an HUF for yourself, it would be advisable to seek proper legal advice. Also make sure to discuss with your attorney the comparative benefits of a trust versus an HUF. A trust offers far more flexibility and simplicity in terms of achieving succession goals.
Rishabh Shroff is partner, Cyril Amarchand Mangaldas. Send in your queries and views at email@example.com