Apart from the splitting of incomes, the HUF has given birth to the concept of family arrangement which has always been the tax planners’ delight.
T.C.ARamanujam, Business Line
The Hindu Undivided Family enjoys a unique status in the Indian tax code. The segregation of the HUF as a separate taxable entity along with the individual, the company and the firm was a concession to the age old Hindu sentiment which regarded the joint family as arising from status, and not from contract. The Mitakshara Hindu Joint family system of law is almost a perfect medium for tax avoidance – the taxpayers, dream come true.
The tax code does not define the term ‘Hindu Undivided Family”. A joint family comprises all persons lineally descendant from a common ancestor and includes their wives and daughters. The constitution of the HUF as a separate taxable entity continues to confer advantages in the matter of tax planning under the law. The Karta can function in dual capacity and can claim salary and other tax benefits through the medium of HUF. The HUF may comprise small or nuclear joint families which may hold property in their right and may be independent taxable entities by themselves quite apart from the apex joint family. A member of the trading joint family may carry on business in his personal account and it will be his individual income and not the income of the HUF.
MYRIAD TAX BENEFITS
A HUF may be formed either by inheritance of property from ancestral sources or by way of gift from distant relations or by way of operation of Will under Section 30 of the Hindu Succession Act of 1956. Even in respect of relations, gifts may be received up to Rs 1.8 lakh a year. The HUF can invest in tax saving schemes up to Rs 1.2 lakh. Income from house property, business from other sources etc can easily be segregated as belonging to the HUF. If there is an income of Rs 16 lakhs, assuming that the individual takes Rs 10 lakh and the HUF Rs 6 lakh, by availing of basic exemption of Rs 1.8 lakh both in the hands of the individual and the HUF and investing in tax saving schemes a total tax of Rs 1.56 lakh can be avoided.
The law was amended radically in 2005. The Central enactment prevails over State laws on the subject. Daughters are treated as coparceners entitled to equal share even if they are married. Despite the radical amendment, the basic preposition remains that the Hindu Undivided Family remains a dominant source for tax avoidance. Apart from the splitting of incomes and the creation of capital build-up files for tax saving purposes, the HUF has given birth to the concept of family arrangement which has always been the tax planners’ delight. Capital gains tax can be avoided by means of a family arrangement.
The myriad tax benefits conferred on the HUF accounts for the increase in the number of returns of income in the names of HUF. Look at the taxpayers profile given in the chart.
HUF ASSESSES RISING
There has been a continuous increase in the number of effective assesses in the status of HUF. The number stands at more than 8 lakh by March 31, 2010. Revenue loss because of the HUF is not indicated anywhere. One need not be a secularist to view with disdain the growing popularity of the HUF as a tax planning tool.
The advantage is special to the Hindu community and is not available for other religious denominations. It benefits taxpayers with high incomes and assets. They can go on creating any number of HUFs under the apex family fold and avoid normal taxes. The Central Board of Direct Taxes can easily work out tax loss because of the HUF. It can also find out who are all the beneficiaries of the concept. So many reforms have taken place in Hindu law. Gender bias has almost been eradicated. That is all in the realm of the personal law of the Hindus. But why should the personal law of the Hindus affect revenue growth? What is the great harm that will arise by abolishing the concept of HUF merely for tax purposes? This can easily be done by excluding the HUF from the definition of ‘person’, under Section 2 of the Indian Income Tax Act, 1961.
Unfortunately, even the DTC contains the very same definition of the term ‘person’ and confers benefits on the HUF. Will the standing committee of Parliament look into this aspect of the tax law while finalising the DTC.
(The author is a former Chief Commissioner of Income-Tax.)
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