Uniform Civil Code: Know income tax benefits of Hindu Undivided Family structure
MUMBAI: Implementation of the Uniform Civil Code (UCC) has caused widespread discussions and debates in the country, and has divided political leaders and analysts on the issue. Tax experts agree that its implementation will affect taxpayers who use Hindu Undivided Family (HUF) for tax planning. After its implementation, the concept of HUF will cease to exist which would have implications for individuals and corporates in terms of tax benefits.
Currently, the HUF, as a separate tax unit, enjoys exemptions, deductions, and a distinct tax exemption limit. Once UCC is implemented, these tax benefits associated with the HUF would no longer be applicable, which would force many taxpayers to rework their income tax planning.
What is a HUF
HUFs have a separate tax identity and are treated as separate taxpayers under the Income Tax Act in India. They are eligible to claim tax deductions, exemptions, and other benefits available to individuals and businesses. HUF income is taxed separately from the individual income of its members.
Under Hindu Law, a HUF is a family which consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. An HUF cannot be created under a contract, it is created automatically in a Hindu Family. Jain and Sikh families even though are not governed by the Hindu Law, but they are treated as HUF under the Act. A HUF has its own PAN and files tax returns independently of its members.
“Once UCC is implemented, there is no chance of it being (HUF) retained, it will have to go. It will increase the tax outgo of the people who have been hitherto using HUF for tax planning. There are many who do not have HUF as a tax entity but there are many others who file their returns under HUF and lots of assets are held in the name of HUFs,” Balwant Jain, a Mumbai-based tax and investment expert said.
Impact of withdrawal of HUF benefits
“Individuals who have been availing tax benefits and planning their finances based on the HUF structure would need to reassess their tax strategies. It could also impact succession planning and the division of ancestral property within Hindu families,” Swati Jain, Strategic Business Advisor, Arihant Capital Markets, told TNIE. “Currently, the HUF is recognised as a separate tax unit under the Income Tax Act. It enjoys a separate tax exemption limit and various tax breaks under sections like 80C, 80D, 80DDB, 112A, and more,” she added. The income tax slab for HUF is the same as that for individuals, with an exemption limit of R2.5 lakh in the old tax regime and R3 lakh in the new tax regime. HUFs also qualify for tax benefits on capital gains and enjoy exemptions in this regard.
“However, if the UCC is implemented, the concept of the HUF may cease to exist. Amendments to the Income Tax Act would likely be required if no specific provisions similar to the ‘Kerala Joint Hindu Family System (Abolition) Act, 1975’ are made in the UCC. This would mean that Hindus would no longer be entitled to claim any interest in ancestral property by birthright,” said Swati Jain.
For corporates, the removal of HUF benefits could impact tax planning for business structures that involve HUF entities. It may require adjustments in tax calculations and potentially affect the overall tax liability of such entities. “The HUF as a tax unit is not of recent origin. This was already there in the Income Tax Act, of 1922, the predecessor of the present Income Tax Act of 1961, under which also it has been continued. Under the present tax laws, an HUF enjoys its existence, distinct and separate, from the members who constitute it. Being a separate tax unit, it enjoys a separate tax exemption limit in addition to the various tax breaks under Sections like 80 C, 80 D, 80 DDB, 112A etc,” said Balwant Jain.
Every HUF is eligible for a basic exemption threshold similar to individual taxpayers. Thus, HUFs would not be subjected to any tax on their total income up to R2.5 lakh.
“As such, HUFs can claim this basic exemption thereby reducing its taxable income. Further, Finance Act 2023 provided that from FY 2023-24, the HUF can avail the benefit of enhanced basic exemption of up to R3 lakh under the new tax regime u/s 115BAC of the Income Tax Act, 1961,” Suresh Surana, Founder, RSM India- a tax consulting firm, said. “As the IT Act identifies HUF as a separate legal entity distinct from its members, HUFs can enjoy separate threshold limits pertaining to various deductions and exemptions available under the IT Act,” he added.
For instance, the threshold limit of R1.5 lakh under section 80C of the IT Act pertaining to various investment-linked deductions such as tax-saving FDs, and equity-linked savings schemes applicable in the case of HUF would be in addition to the threshold limit enjoyed by the members.
HUF provides a structured manner for the purpose of transferring wealth to the next generation by ensuring the interest and basic requirements of the family members are provided for and also as a structure to achieve tax optimization at the family level.
Tax planning and HUF
- Once UCC is implemented, HUF concept will cease to exist.
- Withdrawal of HUF benefits under UCC impacts individuals and corporates.
- Individuals relying on HUF structure for tax benefits would need to reassess their tax strategies.
- Removal of tax benefits to increase tax outgo of people using HUF for tax planning.
- Currently, HUFs enjoy separate tax identity, exemptions, and deductions under the Income Tax Act.