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Will HUFs cease to exist as tax units as recommended by the law commission?

Author: Balwant Jain/Wednesday, September 26, 2018/Categories: Tax, Expert View

Will HUFs cease to exist as tax units as recommended by the law commission?

A consultation paper issued by the Law Commission of India on August 31, 2018 called “Reforms of Family Laws” has suggested that the Hindu Undivided Family (HUF) be removed as a tax unit. What are the consequences of such a recommendation if it is turned into a law? Let us understand the exact suggestion of the Law Commission and its implications.

The historical reason for introduction of HUF as tax units

Long back when urbanisation had not gripped the country, family with many generations used to abide together sharing common roof and food. This represented a joint family which also had joint property relationship amongst its members. The family, in majority of the cases, owned businesses which ran as a single business unit. The name HUF is derived from it. Income of the HUF was meant to be available for maintenance and for various expenses of the family members. To recognise it, the Britishers introduced a concept of HUF, as a separate tax unit, under the Income Tax Act, 1922. This was continued in the current Income Tax Act, which came into effect in 1961. Under the present tax laws, an HUF enjoys a separate existence, distinct from its members. It enjoys separate tax exemption limit as well as various tax breaks under Section like 80C, 80D, 80DDB, 112A etc.

Law Commission’s suggestion

A Direct Taxes Enquiry Committee under the chairmanship of K.N. Wanchoo in 1971 had observed that the HUF has been used for tax evasion in the country. The Law Commission also agreed with the observations of the Wanchoo Committee and observed that continuation of the institution of HUF on grounds of deep-rooted sentiments at the cost of the country’s revenues is not justified and thus has therefore proposed removal of special tax treatment for an HUF under the tax laws.

What should you do now?

It is not that the consultation paper will turn into law all of a sudden. In order to make laws in India, a very long process is followed. Based on the response received to its consultation paper, the Law Commission may or may not suggest removal of HUF as a separate tax unit under the tax laws. If it recommends the removal, it will send a draft of the bill for the proposed legislation with is recommendation to the ministry of law And justice. The ministry in turn will weigh the proposal and take its decision. The recommendations of the Law Commission are not binding on the ministry. So the ministry may altogether decide not to act on the recommendations of the Law Commission. In case the ministry accepts the suggestions, it will place the proposed legislation before Parliament. The bill will be discussed in both houses of Parliament and if need is felt, the bill will even be referred to a select committee for further discussion. After deliberation in both the houses, the bill will be passed with requisite majority and sent to the President for his assent. It is only after the bill is assented by the President that it becomes a law in the country. It is a very long journey for the proposals of the Law Commission to take the shape of a law.

Is it possible to implement the suggestion?

The concept of HUF applies to all people except Parsis, Muslims, Christians and Jews. So the proportion of the population to be affected by such legislation is very significant. As we are all aware that the political parties normally base their decision on vote bank considerations, no political party worth its salt can afford to buy displeasure of the majority of the population and implement it. The uproar against amendment of SC/ST act is fresh in our minds even now.

What if proposal takes the form of law?

If the proposal of the Law Commission is accepted, the provisions may be on similar lines as those in the “Kerala Joint Hindu Family System (Abolition) Act, 1975”. This legislation provides that all institutions of HUF will not be recognised in the state of Kerala after the law is enacted. It provides that once the law comes into effect, no Hindu will be entitled to claim any interest in ancestral property due to his birth in the family. The law further provides that all the assets of the erstwhile HUF in the state of Kerala shall be deemed to have been divided and distributed amongst all the members who are entitled to get a share in the assets of the HUF. Hence after the deemed partition of all the assets of the HUF, all the members shall hold the immovable property, which cannot be divided in pieces, as tenant in common. Each member will, therefore, become an owner of his share of the property.

I presume the law as and when implemented will be on similar lines. So the income earned by members of the HUF in respect of his share in the HUF asset/properties not divided physically will be included in the income of all the members.

The above discussion makes it amply clear that the tax payers who have been assessed as HUF need not worry and do anything immediately. They instead need to wait and watch the progress of the proposal as it may not be implemented eventually. Even if it becomes a law, it will be some time from now.

The author is a tax and investment expert and can be reached on

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Balwant Jain
Balwant Jain

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