Amid all the wide diversity there is a philosophy of underlying unity in India. Yet, at the dawn of freedom, the founding fathers of our nation chose to continue separate personal laws for its citizens based on their religious identities. This was despite the fact that the new constitution embraced secularism. While Hindus continue to be governed by the Hindu laws, Muslims follow the Mohammedan laws and so on. Personal laws are set of laws relating to marriage, divorce, guardianship, adoption, maintenance, succession to estate and such other family related matters. This paper attempts to understand the unique tax saving opportunity available for Hindus in the form of Hindu Undivided Family (HUF) concept. Firstly, let us analyze how HUF is a tax saving tool. Next we will understand certain anti-abuse provisions relating to HUF in the tax laws due to which certain aspects of HUF vary significantly from the principles under civil laws. Finally we will identify the actual avenues of tax saving available currently given that most of the ‘loop holes’ in the tax laws have been plugged. All references, in this paper, to tax laws are to be read as Income Tax Act, 1961 and the rules thereof. While under the civil laws, the term Joint Hindu Family (JHF) is frequently used, the tax laws use the term Hindu Undivided Family (HUF). In this paper, HUF and JHF are interchangeably used.
Hindu Law: Joint Hindu Family and Coparcenery
To begin with, without going into too many details, a quick recapitulation of principles and provisions of joint family and coparcenery in the Hindu law would be appropriate. A joint Hindu family (JHF) consists of all persons who are lineally descended from a common Hindu ancestor and includes their wives and unmarried daughters. No stranger can be admitted into it except by way of marriage or adoption. A JHF consists of not only male members but also female members. However, a joint family may also consist of only female members. A joint Hindu family is the normal condition of a Hindu society. A joint Hindu family is joint in food, worship and estate. With severance of joint estate, a joint Hindu family ceases to exist. Mere severance in food and worship does not operate as a separation. A joint family may be broken up by partition and the separating member would form a new joint family with his descendents. Hindu coparcenery was a male dominated system under Mitakshara law where only son, grandson and great-grandson (i.e. lineal male descendants within four degrees) acquired interest in the coparcenery property by birth. An adult coparcener at anytime could ask for a partition. However, under the Dayabhaga school of law, there are two differences. Firstly, the sons do not acquire any interest by birth and only on the death of the father such right arises. Secondly, females too could be coparceners. With the amendment made to the Hindu Succession Act in the year 2005, now a daughter of a coparcener of a Mitakshara Hindu family has the same rights and liabilities as a son. Such rights and liabilities continue even after her marriage. The states of Karnataka, Maharashtra, Andhra Pradesh and Tamil Nadu had already amended their laws to this effect much earlier. Kerala had gone a step ahead and abolished the joint family system in the year 1975. As observed by the Privy Council, in a Hindu coparcenery under Mitakshara law, “there is community of interest and unity of possession between all the members of the family”. The members are joint tenants with right of survivorship. However, the devolution by survivorship has been given a go by to a great extent with the 2005 amendment of the Hindu Succession Act. Now, Section 6 provides for inheritance by succession even in respect of interest of a coparcener in joint family property. A member of a JHF may hold separate properties apart from the family property which he may dispose of by a will and...