Taxpayers belonging to Hindu, Jain, Buddhist and Sikh communities may save additional taxes by forming Hindu Undivided Family (HUF) with their family members. However, before forming an HUF, one should know, how to dissolve an HUF and what will happen to their investments made through the HUF after its dissolution.
Dr. Suresh Surana, Founder, RSM India, answers the following questions in order to clear the doubts.
How may an HUF be dissolved?
HUF can be dissolved by executing partition deed among all the members. The property of HUF should be divided equally amongst the HUF coparceners in accordance with the Hindu Succession Act. In the context of an HUF, a coparcener is a person who acquires right in the ancestral property by birth. As such, coparceners have a right to demand partition in the HUF property and not other members. Earlier only male members up to three lineal descendants (e.g. son, son’s son and son’s grandson) were considered as coparceners. However, post amendment of Hindu succession (amendment) Act, 2005 daughters can also be coparceners in the Father’s HUF and can demand partition.
It is pertinent to note that the Income tax Act, 1961 (hereinafter referred to as ‘the IT Act’ only recognises full partition and accordingly partial partition of the property would not dissolve the HUF as the Revenue authorities would continue to assess the income of such HUF and Income tax returns would be required to be filed mandatorily. For the purpose of partition of HUF to be considered as valid, the HUF has to make an application or claim of partition having taken place among the members of such HUF before the Income Tax Assessing Officer (AO). The AO may on receipt of such application make an enquiry as necessary.
On Completion of inquiry, the AO shall make an order under section 171(3) of the Income Tax Act accepting or rejecting the claim of partition as also the date on which the partition has taken place. It is notable that such an order is necessary, otherwise, the HUF shall continue to be assessed in the status of HUF by the income tax authorities.
Once the full partition of the HUF is carried out, the HUF can be closed and PAN of HUF should be surrendered to AO.
Tax saving through HUF: Tax saving investments a Hindu Undivided Family is eligible for
What happens to a HUF if all but one member die? For example, in case a childless couple creates a HUF for tax saving purposes, what will happen to the HUF and the investments made through it, after the death of one of them?
An HUF can be formed by a married couple or members of a joint family. Thus, minimum two members are required to constitute a HUF and in case one of them dies, the sole surviving member can’t constitute a HUF. The HUF property would be assessed in the hands of such sole surviving member in the absence of any other member or coparcener.
Will there be any difference in the procedure, in case of death of the Karta first and in the other case death of the other member first?
After the death of Karta, the next senior most member of the family automatically becomes the next Karta of the HUF. Any other coparcener can become Karta if the senior most coparcener gives up his right, with the consent of all coparceners.
Procedure to be followed if Karta dies- Since Karta has authority to operate the bank account of HUF, it is necessary to delegate the authority to new Karta in order to continue the operations. Also, the Income tax authorities need to be intimated about the change in Karta. The Bank and the Revenue authorities can be intimidated by submitting a declaration. Certain other documents may be annexed to such declaration as required for instance, No objection letter to the bank by new Karta and all co-parceners, Copy of death certificate of Karta, etc.
If any other member of the HUF dies, no specific procedures are required to be followed since the existence of HUF continues not affected by the death of a member.