What is HUF?
The Hindu Undivided Family (HUF) is a special feature of Hindu society. Hindu Undivided Family is defined as consisting of a common ancestor and all his lineal male descendants together with their wives and daughters. Therefore a Hindu Undivided Family consists of males and females. Daughters born in the family are coparcener and women married into the family are equally members of the undivided family. On the other hand at any given point of time a coparcenary is limited to only members in the four degrees of the common male ancestor and daughter.
Common Terms in HUF
Hindu: In this term are included all the persons who are Hindus by religion. Section 2 of the Hindu Succession Act, 1956, elaborately declares that it applies to any person, who is a Hindu by religion in any of its forms or developments, including a Virashaiva, a Lingayat or a follower of Brahmo, Prathana or Arya Samaj, a Buddist, Jain or Sikh. In CWT. Smt. Champa Kumari Singh (1972) 83 ITR 720, the Supreme Court held that the HUF includes Jain Undivided Family
Hindu Undivided Family (HUF) is a legal expression which has been employed in taxation laws as a separate taxable entity. It is the same thing as “Joint Hindu Family”. It has not been defined under the Income Tax Act, as it has a well defined connotation under Hindu Law.
A Hindu Undivided Family (HUF) is a separate entity for taxation under the provisions of sec. 2(31) of the Income Tax Act, 1961. This is in addition to an individual as a separate taxable entity , it means that the same person can be assessed in two different capacities viz. as an individual and as Karta of his HUF.
Loan given by HUF to its member and its taxability
The money transferred by the Karta of the HUF may either be treated as loan if the same is intended to be repaid or it can be treated as gift if the money is not intended to repaid. As per Section 56(2) any gift received from specified relatives is tax free in the hands of the recipient. A member of the HUF is treated as relative of the HUF hence there is no tax implication at the time of the receipt of the money for HUF. However, due to the clubbing provision income earned by the HUF on the money gifted by its Karta will be treated as income of the Karta and will be added to his income year after year. The clubbing provisions will apply till the assets of the HUF are fully partitioned. Please note that it is only income on the asset transferred which will be subject to clubbing provision and not the income earned on the income which will be clubbed under the clubbing provision.
If the money is treated as interest free loan, there is a likelihood of the assessing officer applying the clubbing by invoking the provisions of Section 60 for transferring the income without transferring the asset because giving of interest free loans may be treated as transferring of income without transferring the asset.
So, while giving loan make sure, the member who gets the loan make payment of Interest. Further, If the member has taken loan to make house or to buy house, interest if paid for such housing loan will be allowed as deduction up to 2,00,000/-
For more information on loan by HUF to its member, you can contact itax@caymshah.in or call +91 9033231693 (Mr. Haard Shah)