A Hindu Undivided Family (HUF) continues to be a widely used structure in India for managing ancestral property, family-owned businesses, and tax planning. While the concept of an HUF is deeply rooted in Hindu law, its treatment under the Income-tax Act, 1961 raises some recurring questions. One such query is: When an HUF distributes its profit after tax to its members, including the Karta, does it become taxable again in their hands?
HUF as a Separate Tax Entity
For income tax purposes, an HUF is recognized as a distinct taxable unit. It files its own return of income, computes taxable profits, and pays tax as per applicable slab rates. The Karta manages the affairs of the HUF, but the liability to tax rests with the family unit as a whole.
Distribution of Profit to Members
Once the HUF has paid income tax on its profits, it may choose to distribute the net surplus among its members, including the Karta. Here, the crucial question arises: Is such distribution taxable once more in the hands of the recipient?
The answer lies in Section 10(2) of the Income-tax Act, 1961, which provides that:
“Any sum received by an individual as a member of a Hindu Undivided Family, where such sum has been paid out of the income of the family, or in the case of an impartible estate, out of the income of the estate belonging to the family, shall not be included in computing the total income of the member.”
This clearly means that profit distribution by the HUF, after payment of its own tax liability, is exempt in the hands of the members. It is treated as merely an application of income and not a fresh accrual of income.
Practical Example
Suppose an HUF earns ₹10,00,000 from business activities. It pays tax of ₹1,20,000 and is left with ₹8,80,000 of post-tax profit. If the HUF distributes ₹2,00,000 to the Karta, this amount is fully exempt from tax in the Karta’s individual return, since the HUF has already discharged its tax liability.
Important Exceptions to Note
While Section 10(2) provides a broad exemption, some situations need special attention:
- Asset distribution: If the HUF distributes capital assets on partition, tax implications may arise depending on the nature of the asset transfer.
- Dividend income: If the HUF receives dividends from companies, these are taxable in the HUF’s hands (since the Dividend Distribution Tax regime was abolished in April 2020). However, once taxed in the HUF, distribution to members remains exempt.
- Unexplained cash/gifts: Any sum received outside the normal course of HUF income (e.g., large gifts not complying with Section 56 rules) may still trigger taxation in the hands of members.
Conclusion
To sum up, distribution of profit after tax by an HUF to its members, including the Karta, is not taxable again in their individual hands. This exemption under Section 10(2) reinforces the principle that the HUF is a separate taxable entity, and once its tax liability is discharged, members are not taxed a second time on the same income.
For families using the HUF structure, this provision provides clarity and prevents double taxation, making the HUF an efficient vehicle for managing and distributing family wealth.