It’s High Time ‘Hindu Undivided Family’ Ceased to Be a Tax Entity

An HUF entity is against the rights enshrined in our constitution and has become a mere tax planning tool in the hands of tax consultants who advise affluent Hindus.

The first and foremost reform in pursuing and securing a uniform civil code for all citizens of India is to abolish the Hindu Undivided Family (HUF) as a separate entity under the Income Tax Act, 1961. The privileged tax treatment of the HUF represents very substantial revenue loss to the exchequer. Treating HUFs as a separate entity also threatens the basic essence of secularity that has been embodied in the spirit of India.

An HUF is a separate entity for taxation under the provisions of section 2 (31) of the IT Act. This is in addition to an individual as a separate taxable entity. The HUF is treated as a person distinct from individual members of the household. This means an individual is assessed in two different capacities – as an individual and as a karta of her HUF. The maximum amount exempt from income tax is Rs 2,50,000 for both individuals and an HUF. In addition to this basic exemption, an HUF is eligible to all those exemptions that are available to an individual resident.

An HUF can be defined as a family that consists of a common ancestor and all his lineal male descendants and their wives and unmarried daughters. An HUF is definitionally a family of Hindus. However, even Buddhists, Jains and Sikhs are regarded as Hindus, and can, therefore, set up HUFs (though Sikhism, Jainism and Buddhism are separate and distinct religions). The concept of an HUF has evolved from ancient Hindu law.

An HUF entity has become a mere tax planning tool in the hands of tax consultants who advise affluent Hindus. The creation of an HUF helps taxpayers to save on substantial taxes. For them, another vista of saving income tax lies through the creation of a separate tax entity. Apart from getting the basic exemption of Rs 2,50,00, it brings substantial tax savings because of the innumerable tax exemptions and deductions which are scattered in the income tax law, which provides that these exemptions and deductions are to be separately available to the HUF. The laws of succession/inheritance and property rights are primarily used by an HUF to file exemptions and transfers in order to reduce their tax liability. This, cumulated with numerous other factors, benefits an HUF greatly and cause disparity between the two different units of tax payers. The super rich in India are the biggest beneficiaries of the HUF’s status in the IT Act.

This is patently unjust and discriminatory to religious minorities like Parsis, Christians, Muslims and Jews who can not set up such separate tax entities and save on taxes.

Although sociological studies and surveys have indicated a decline in the joint family system, the number of HUFs as a tax entities are increasing every year. Though the principles of “spindaship” (sharing a house, food and a place of worship) are not followed, yet on paper their family is classified as an HUF. The primary reason for this is that beneficiaries can then save a greater proportion of their income by being protected under the cover of exemptions and transfer facilities available to an original HUF. These benefits get multiplied even more because of small size of these families.

All citizens of India are equal before law, particularly in relation to the application of tax laws. The principles of equality before law and the revenue considerations of a state supersede religious rights. There are about 10,00,000 HUF assesses who are filing tax returns in India (there were 8,40,720 in 2012-13 and 9,40,061 in 2014-15, according to statistics from the income tax department). We estimate that the revenue loss to the government of India would be thousands of crores of rupees annually. The revenue loss is actual loss suffered by the nation and not a notional loss, as in the case of telecom spectrum allocation. Nowhere in the world does such patently unjust discrimination exist and is such a class of tax assesses is allowed, that too on the basis of religion.

These are the opening words of the preamble of constitution:

“WE, THE PEOPLE OF INDIA, having solemnly resolved to constitute India into a SOVEREIGN, SOCIALIST, SECULAR, DEMOCRATIC, REPUBLIC and to secure all its citizens:

JUSTICE, social, economic and political;

LIBERTY of thought , expression, belief, faith and worship;

EQUALITY of status and of opportunity; and to promote among them all

FRATERNITY assuring the dignity of the individual and the unity and integrity of the Nation”

The directive principles of state policy, embodied in part IV of the constitution, are directions given to the state to guide the establishment of an economic and social democracy, as proposed by the preamble. Article 44 provides that “The State shall endeavour to provide for its citizens a uniform civil code throughout the territory of India”, by eliminating discrepancies between various personal laws currently in force in the country.

The right to equality is one of the chief guarantees of the constitution. It is embodied in Articles 14-16, which collectively encompass the general principles of equality before law and non-discrimination. Article 14 guarantees equality before law as well as equal protection of the law to all persons within the territory of India. This includes the equal subjection of all persons to the authority of law, as well as equal treatment of persons in similar circumstances. Article 15 prohibits discrimination on the grounds only of religion, race, caste, sex, place of birth, or any of them.

The government should not perpetuate unjust enrichment of affluent sections of a dominant and majority religion and injustice to other religious minorities. It should, then, initiate immediate steps to abolish HUF status as a separate entity in the IT Act. In the interim, for the current financial year, the prime minister should appeal to HUF assesses to renounce and forgo their HUF status in the interest of government revenue of thousands of crores of rupees annually and nation building, like in the case of the LPG subsidy (which in any case is a insignificant amount in comparison).

Janhit Manch is a Mumbai-based NGO that works on governance issues