After the article on the tax benefits available to a Hindu Undivided Family (HUF), let us now look at the legal aspects of an HUF and how to set up one.
How to set up an HUF
Since the word "Hindu" is part of it, only a person who is Hindu can have an HUF. The word Hindu is used in a liberal way and includes persons of Jain, Sikh and Buddha religion. So Muslims, Pareses, Jews and Christians cannot have an HUF. An HUF can have four generations of descendants from a common ancestor. An HUF is creation of law and cannot be created by acts of the persons.
Difference between coparcener and HUF members
Any person who is born in the family is treated as coparcener and anyone who is married into the family is a pure member. Moreover, a person who is adopted into the family is also treated as a coparcener. Prior to amendment in the Hindu Succession Act, 1956 in 2005, only male members could become coparceners and females including daughters could only become a member. Now daughters have the same status as a son and, thus, become coparcener. So a new HUF will come into existence as soon as a child, whether a daughter or a son, is born to a Hindu couple. However, husband and wife themselves can constitute an HUF in cases where any ancestral property is received by the person on behalf of the HUF.
All the coparceners are members of the HUF, but vice versa is not true. All members, including coparceners, have a right to be maintained out of the funds of the HUF. The widow and children of a deceased coparcener have the right to be maintained out of the HUF property. It is only the coparcener who has the right to ask for partition of the HUF assets to claim his/her share. The pure members do not have the right to ask for a partition, but will get their share in the HUF property as and when the partition takes place. As daughter is treated as a coparcener after the amendment in the law, she can also ask for partition of the assets of the HUF.
Management of HUF
An HUF is managed by a Karta, who is usually the senior most male member in the family. In case the senior most male member is not willing to act as Karta, any other coparcener can be appointed as Karta by the family, to manage affairs of the HUF. A Karta can appoint any person to act as a Manager of the HUF, to manager affairs of the HUF. The manager need not be a member of the HUF.
A widow cannot act as Karta as she is not a coparcener. Likewise, a minor cannot be appointed as Karta as he is not competent to contract as per the provisions of Indian Contract Act, 1872. However, a widow can act as Karta representing the minor. After marriage of the daughter the daughter continues to remain the coparcener of his father's family and at the same time becomes member of her husband's HUF. As per a Delhi High Court decision in the case of Sujata Sharma versus Manu Gupta, in 2015 , even a daughter can act as a full fledged Karta of her father's HUF. However, since she is not a Coparcener of her husband's family, she can not become a Karta there.
Residential status under Income Tax Laws
Since your income in India is taxed based on your residential status, it is important to understand how the residential status of the HUF is determined, as it is not a physical person. An HUF is treated as non-resident of India, if and only if, whole of the control and management of the affairs of HUF is situated outside India during the previous year. So even if a small part of the management remains in India, it will become resident for tax purpose. It is not necessary that for determining the control and management of the HUF, the physical presence of the Karta is to be taken into account. An HUF can be resident of India in a situation where the Karta is residing outside India for the whole years, but the affairs of the HUF are managed by a manager under direction and guidance of the Karta.
HUF IS A CREATION OF LAW
- Hindus, Sikhs, Jains and Buddhists can follow HUF structure
- Son or daughter can head HUF or can be Karta
- HUF can have non-resident status for tax purposes, only if entire management of the HUF is situated outside India
- Coparceners and members have right to be maintained by funds of HUF. But only coparceners can ask for partition of the assets
The author is tax and investment expert
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 "Hindu Undivided Family")
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