Pitfalls Of Forming HUFs
Creating and registering an HUF is fairly easy but complications arise later on. You should first understand the following disadvantages of forming a HUF before you decide to form one.
Once a property is assigned to an HUF, all coparceners have equal right to it (also includes an unborn child in the womb of a mother).
Now the assets belong to the family and not to any specific individual.
Moreover, assets cannot be transferred or sold without the consent of all coparceners, and even the Karta cannot transfer it to anyone without everyone’s consent.
If there is a legal dispute around the property, then selling it can become extremely difficult.
If there are few members in HUF, then things run smoothly.
But problems appear mostly when the number of coparceners increases.
Since all lineal descendants are part of an HUF, every child, whether boy or girl, who gets added to the family, becomes a part of the HUF.
One cannot stop the ownership, it is assigned by birth.
Earlier joint families were the norm in India, but now nuclear families are the norm and with it divorce cases are also increasing.
Divorce can add to complications as once someone becomes a coparcener in an HUF, the person cannot be moved out.
Difficult to dissolve:
An HUF can be dissolved only if all the members agree for complete partition. It is only on a complete partition that the assets or property can be shared by the coparceners.
Partition of real estate belonging to an HUF can be a nightmare and leads to disputes and court cases very often.
A partial dissolution (partial partition) can be done but is not recognised by income tax law.
Perceived Money laundering tool:
The goal for which the HUF is created has to be clear. If the purpose is only tax saving, it will work only for the initial years.
As income and number of members grow, complications, too, increase.
If the income tax authorities feel that the HUF has been created to launder money, it may choose to take suitable action against it.
Taxation of Assets:
Taxation of assets may be an issue as personal funds are put into an HUF, they will actually be clubbed with the coparcener’s individual income.
This move might not work if the original purpose of starting the HUF was tax-saving.
Domicile change by family members:
HUFs are essentially an Indian phenomenon. Some family members move abroad either to study or work and the computation of income can be difficult as many countries do not recognize HUF.
The computation of income in such cases is still a grey area.
Complex laws and poor understanding:
The root-cause of most problems is poor understanding of the laws that govern HUFs.
These laws are not codified and are read along with the Hindu Succession Act and the Income-tax Act.
Younger generation, mostly, do not understand these laws, especially because laws around HUFs are complicated.
Then they either do not agree with their Indian members or get into disputes with them.