Problems associated with HUF

Taxes | admin | June 27, 2011 at 9:42 am

Not everything about the HUF is good. Here are some of the disadvantages of the joint family arrangement.

Additional paperwork

The HUF is a separate legal entity as well as a taxpayer. You need to maintain books of accounts and all the paperwork that goes into the tax planning for an individual. "Most individual taxpayers find it difficult to maintain their own tax documents. How will such people manage if they are to maintain the records of another taxpayer as well?" asks a chartered accountant.

Selling property is difficult

Property is an illiquid asset because of several reasons. It's difficult to get a buyer at the right price and at the right time. If the property happens to be owned by an HUF, there are even fewer buyers. "Everybody wants to buy a house with a clear title. An HUF property can have several claimants, which makes the buyer wary," says Minal Agarwal, partner in MK Agarwal and Company. HUF property is usually sold at the time of partition. If this partition is acrimonious and there is a possibility of a legal dispute among co-parceners , selling the property can become virtually impossible.

Family must be unified

It is crucial for the HUF to be unified. Even if one co-parcener decides to sever his ties with the joint family, the entire structure can collapse. "Even if one co-parcener demands the partition of the HUF property, the other coparceners will have to agree even though they may not want a partition," says Priyambada Sen, senior manager, Deloitte Haskins & Sells. Till a few decades ago, an HUF could be partially partitioned by giving the prodigal coparcener his share of the HUF property. But in 1978, the law was amended, which made it compulsory for HUFs to partition it completely. "This was done to prevent the misuse of partitioning facility.

People used to split their HUFs and later reunite to save on tax," says Mahesh Agarwal. Now, if there is a demand for partition, the karta will have to sign a declaration and submit it to the tax department informing it about the dissolution of the HUF.

Splitting some assets isn't easy

If the HUF has only financial assets (stocks, investments, fixed deposits, etc), gold and cash, it can be easily distributed among the co-parceners . But if the assets include immoveable property or a running business, it is not very easy to split them. Ancestral property may need to be sold to give a share to all co-parceners . If some co-parceners don't want to sell ancestral property, they will have to arrange for funds to pay the co-parceners who have demanded the dissolution of the HUF. Arranging a huge sum at a short notice may not be every person's cup of tea.

One-way street

Transfer of assets to HUF is a one-way street. You can put assets in the HUF, but these can be taken out only by dissolving the HUF. So, if some asset, such as an ancestral house, has been put into the hotchpot, you will have little control over it. The kartatoo can distribute the income earned by the HUF but not the assets without dissolving the unit.

Source: Economic Times