Computation of Total Income of HUF
Computation of Total Income of HUF
A Hindu Undivided Family (HUF) is a joint family which may or may not be following the religion of Hinduism. Contrary to the apparent impression which can be gleaned from the term HUF, even families which are not practising Hinduism can be categorised as HUFs. The term Hindu Undivided Family should be construed according to the Hindu Succession Act, 1956. As per the Act, a HUF is a joint family that consists of all individuals lineally descended from a common ancestor, whether or not they are following Hinduism as their religion. The relation of a HUF does not arise from a contract but status. HUFs are treated as separate entities for assessment under the Income Tax Act. In this article, we look at the procedure for Computation of Total Income of HUF.
Meaning of HUF under the Hindu Succession Act, 1956
According to the Act, the following kinds of persons are governed by the concept of a HUF:
- Hindus, Buddhists, Jains, Sikhs, Virashaivas, Lingayats, Brahmo Samajists, Prarthana Samajists, and Arya Samajists
- A person who is converted or reconverted into any of the above religions
- Any other person who is not a Musli, Parsi, Jew or Christian
- An individual whose one parent or both parents fall under one of the above categories
- An individual who was brought up by a family or community which falls under one of the above categories
Hence, we see that although the common understanding implies that HUFs are Hindu families, the definition given by the Act is much more broad in nature.
Specifics of Computation
Below mentioned are the particulars of computing the total income of a Hindu Undivided Family.
- Income from the transfer of a self-acquired asset, without adequate consideration or conversion of the same into a joint family property, shall not be treated as the income of the HUF. It shall continue to be taxed under the transferor who is a member of the HUF.
- The income from an impartible estate is taxable under the holder of the estate and not in the hands of the HUF.
- Any remuneration or fee received by a member of the HUF as a director or a partner of a company or firm as a result of an investment made in the concerned business establishment from the funds of the HUF shall be treated as income of the same. However, if a member earns such an amount as a director or a partner for the services rendered purely in a personal capacity due to own aptitude to the business of the concern, it shall be treated as the income of the individual and not the HUF. Judicial pronouncements have stated that the remuneration and commissions received by the Karta of HUF on account of his qualifications and exertions and not on account of investments of the family funds in the company cannot be treated as an income of HUF.
- If the remuneration is paid to a Karta of a HUF satisfies the following conditions, the remuneration paid entirely and exclusively for the business run by the family, shall be allowable as an expenditure while computing the income of the HUF and the remuneration shall be taxable in the hands of the Karta as salary income:
- (a) under a valid agreement which has been registered by paying the relevant amount of stamp-duty,
- (b) is in the interest of, and expedient for, the business of the family, and
- (c) the payment is genuine and not in excess of the amount allowable under a similar arms’ length transaction conducted in the open market.
- If the father does not have a son or a brother who are coparceners, the income arising from ancestral propertied is taxable.
- A Karta, in his individual capacity and representing a HUF, are two different entities. Hence, HUFs can sublet a contract to a Karta in his own capacity. Income earned by a Karta in his individual capacity from a registered commercial agreement cannot be assessed as part of the taxable income of the specific Hindu Undivided Family.
Computing Income of HUF
The following steps can be followed to calculate the total income tax of a Hindu Undivided Family.
Step 1: The Gross Total Income of a HUF, like any other individual, shall be computed under the four heads of income, with their residential status as the basis. There can be no income under ‘income from salaries’ in the case of a Hindu Undivided Family.
Step 2: Section 60 to 63 relating to the income of other individuals included in the assessee’s total income are applicable in the case of a HUF. However, Section 64 is not relevant to HUF as it is relevant in the case of the 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 the past years, if allowed, is permissible.
Step 5: The income calculated in Steps 1 to 4 is known as the Gross Total Income from which the following deductions under Sections 80C to 80U will be allowed:
|Serial Number||Section||Nature of Deductions|
|1||80C||Deduction concerning life insurance premia, deferred annuity, contributions to provident fund, subscription to certain equity shared or debentures, etc.|
|2||80D||Payment of medical insurance premia|
|3||80DD||Medical treatment of disabled dependents and deposits made for the maintenance of handicapped dependents.|
|4||80DDB||Deduction in respect of medical treatment, etc.|
|5||80G||Donations to certain funds/ charitable institutions etc.|
|6||80GGA||Specific donations made for scientific research or rural development.|
|7||80GGC||A contribution is given by any person to political parties.|
|8||80-IA||Gains and profits of new industrial undertakings or enterprises engaged in infrastructure development, etc.|
|9||80-IB||Profits and benefits of new industrial ventures other than infrastructure development undertakings.|
|10||80-IBA||Deduction in respect of profits and gains from housing projects provided the project fulfils certain conditions|
|11||80-IC||Deductions in respect of specific tasks of enterprises in certain special category states.|
|12||80-ID||Deduction concerning profits and gains from the business of hotels and convention centres in a specified area.|
|13||80-IE||Special provision in respect of certain undertakings in the North-Eastern States.|
|14||80JJA||Deduction concerning profits and gains from business of collecting processing of bio-degradable waste.|
|15||80JJAA||Deduction in respect to the employment of new workmen|
|16||80TTA||Deduction in respect of interest on deposits in saving account|
Step 6: The remaining income after allowing the mentioned deductions is known as the Total Income which will be rounded off to the nearest INR 10/-.
Step 7: Calculate the tax on such total income at the prescribed rates of tax.
Step 8: Allow the rebate under Section 88E.
Step 9: Add surcharge at 10% on total income exceeding INR 50 lakhs and up to INR 1 crore and 15% of such income-tax in case of a person having a total income exceeding INR 1 crore.
Step 10: The balance is the total of the tax that is payable which will be raised by a surcharge on such income tax if applicable.
Step 11: Education Cess at 2 per cent with additional Secondary and Higher Education Cess at 1 per cent on the tax plus a surcharge if any shall be levied.
Step 12: Deduct the TDS, advance tax paid for the relevant assessment year, double taxation relief under Sections 89, 90, 90A or 91 and double taxation relief under Sections 90, 90A and 91. The balance is the net tax that is payable which will be rounded off to the nearest INR 10/- and must be paid as self-assessment tax before submitting the return of income.
In computing the income under ‘Capital Gains’, the HUF is also entitled to the following exemptions.
- Section 54:Capital gain on sale of property used for residence.
- Section 54B: Capital gains on transfer of agricultural land.
- Section 54D: Capital gain on the compulsory acquisition of lands and buildings.
- Section 54EC: Capital gain on transfer of long-term capital assets.
- Section 54F: Capital gain on the transfer of certain capital assets where investment is made in a residential house.
- Section 54G: Capital gain on transfer of assets on shifting of an industrial undertaking from an urban area.
- As stated in Section 47 of the Income Tax Act, no capital gains shall arise to the Hindu Undivided Family (HUF) on the distribution of assets on the partition of Hindu Undivided Family (HUF).
Remuneration and Salary
Remuneration paid by a Hindu Undivided Family (HUF) to the Karta or any member of the HUF
If any remuneration is given to the HUF to the Karta or any other member of the family for services rendered by the individual in conducting the family’s business, the remuneration is deductible if the payment is:
- paid under a bona fide and valid agreement;
- in the interest of expediency for the business which is conducted by the family; and
- reasonable and not excessive.
Remuneration that is paid and exclusively for the business of the family, would be allowable as an expenditure while computing the HUF from the income. and such salary is taxable in the hands of Karta/member as an individual income.
Remuneration and commission obtained by the Karta of a HUF
On account of his personal qualification/ exertions and not on account of investment of family funds in the company and therefore, could not be treated as an income of the HUF. It is also since the Tribunal is final fact-finding authority, the High Court was not right to hold the income that was to be treated as the HUF’s income.
Salary received by a HUF member from the firm managed by the member
The law is well-settled that if a member of a HUF joins a partnership and is given a salary for maintaining a firm or for rendering special services to the firm, the salary would be the person’s individual income.