MC Explains: When a Hindu Undivided Family may not work

In our last column, when we introduced you to the concept of the Hindu Undivided Family (HUF) and why it exists, we listed the many benefits that come with an HUF structure.

Just to recap, HUF, as a concept, was created to ensure that families stay together and keep control of their businesses.

Today, families are still following the principle laid down ages ago. This ensures that the wealth created by and control of a family business remains within the family’s fold.

On the flip side, some practical hurdles may arise with the formation and dissolution of an HUF. Let us take a look at some.

Transfer of property 

One of the greatest disadvantages, cloaked as an advantage, of the structure is that all members have a right to the properties and other assets of an HUF.

Such joint assets cannot be sold without the consent of all members of the HUF. This would mean that every time one buys a property in the name of the HUF, it will belong to every members of the HUF and not just to the person purchasing it.

This rule creates several issues when the family grows and expands into multiple branches, which may also lead to disputes among members.

As a member owes his/her right to an HUF by birth, he/she (known as a coparcener) cannot bequeath their share to anyone. Also, a member by marriage is only entitled to maintenance and gets no share of the HUF.

A coparcener, in the literal sense, means a joint heir. Any individual born in an HUF automatically becomes a coparcener.

When can a HUF sell property?

If the HUF is the owner of a property, the asset can only be alienated /sold in certain circumstances.

This can be either by the consent of all coparceners of the HUF or by the karta (typically the eldest of them) to meet a legal necessity or for the benefit of the HUF, in which case consent of all coparceners is not required; yet, a coparcener can challenge such a decision.

The property can also be alienated or sold by disposing of the assets of the HUF in case of a sole surviving coparcener.

If a minor child is involved in the HUF, permission of a court is required to create any third-party rights to any of the assets of an HUF.

So when a property is held in the name of an HUF, one has to be mindful of the restrictions on its transfer and on the tax implications arising out of it.

No universal recognition

An HUF is not recognized in other countries as it is a purely Indian concept. income assessment can become a challenge for members moving abroad or obtaining citizenship of other countries. Further, an HUF cannot get Private Equity funding for a business conducted by it.

HUF partition and dissolution

An HUF may need to be dissolved in case of death of members or in case of a partition between members of the HUF.

Once an HUF is closed and dissolved, its assets and properties need to be distributed among all its members, which can be challenging.

The partition can either be total or partial and the property can be partitioned through a physical division. If physical division is not possible, a notional division can be undertaken.

A total partition amounts to dissolution of the HUF; the entire joint family property is divided among all coparceners and the family ceases to exist as an HUF.

In a partial partition, one coparcener or more and their branch of the family may separate from the others; the remaining coparceners may continue to be an HUF.

In such a scenario, the share in the HUF properties of the person leaving the HUF is determined and handed over to him/her. One needs to ensure that a proper agreement is entered into with respect to each of the assets that belongs to the HUF, to ensure that the departing coparcener and his/her branch of family cannot make any claim to the remaining estate of the HUF.

Only coparceners of an HUF are entitled to carry out a partition. Any coparcener can, through a written notice, dissolve the HUF. An HUF owning immovable properties can be dissolved by executing a partition deed or by filing of a partition suit among all coparceners.

If only one or more coparceners of the HUF, but not all, agree to the partition through a partition deed, it cannot be called dissolution of the HUF, as the deed only extinguishes the coparceners’ rights in an HUF by detaching their interest in the joint property and the remaining continue as an HUF.

The government of Maharashtra, through a circular dated April 21, 2018, said the partition of the property of an HUF does not fall under the definition of “transfer.” It’s not compulsory for such types of partition to be registered. The applicable stamp duty on the partition deed is payable in lines with the provisions of the Maharashtra Stamp Act.

Does an HUF really help?

An HUF has both advantages and drawbacks.

Benefits from HUF can be multiplied and it can serve as a useful planning tool that can be used to maximize your benefits, keeping in mind the interests of the family.

However, it needs to be strategically planned with a long-term perspective. While creating an HUF may be useful for tax planning and investments, one has to be mindful that it entails issues in joint families and poses legal challenges in dissolution and partitioning of the entity.

As the family grows, the dissolution process becomes even more tedious and complicated. It then not only becomes emotionally taxing but even legally challenging to dissolve and distribute an HUF’s assets.