Fee or Salary earned by Karta as Director or Partner Under Person

Under Indian income tax laws, the concept of a Hindu Undivided Family (HUF) plays a significant role in determining the taxability of the income earned by the Karta, who is the head of the family. One of the common sources of income for the Karta of an HUF is the fee or salary earned by serving as a director or partner of a company or firm. In this article, we will delve into the relevant legal provisions and principles related to the taxation of such income under Indian law.

Understanding the Role of Karta in an HUF

An HUF is a unique entity recognized under Indian law, comprising members of a Hindu family who are lineal descendants of a common ancestor. The eldest male member in the family assumes the role of the Karta, who manages the affairs of the HUF and represents it in various transactions. The Karta exercises control and decision-making authority over the income and assets of the HUF, making him responsible for the tax implications arising from the HUF’s activities, including the income earned by serving as a director or partner in a company or firm.

Taxability of Fee Earned by the Karta as Director

When the Karta of an HUF receives a fee for acting as a director in a company, the tax treatment of such remuneration is determined based on the capacity in which the Karta serves and the nature of the income earned. As per Section 10(17A) of the Income Tax Act, 1961, any fee received by the Karta for being a director in a company is taxable as his individual income and not as the income of the HUF. This provision clarifies that the fee earned by the Karta in his capacity as a director is to be assessed under the head “Income from Salaries” in his personal capacity and not as a representative of the HUF.

It is essential for the Karta to maintain a clear distinction between his individual income and the income of the HUF, especially when receiving remuneration as a director of a company. By adhering to tax regulations and practices, the Karta can ensure compliance with the applicable laws and avoid any potential scrutiny or disputes related to the tax treatment of his director’s fee.

Taxation of Salary Received by the Karta as Partner

In the context of partnership firms, the Karta of an HUF may also participate as a partner in a partnership business, thereby earning a share of profits and receiving a salary for his contribution to the firm. The taxation of such salary earned by the Karta as a partner is subject to specific provisions under the Income Tax Act.

Under the income tax laws, the share of profits received by the Karta from the partnership firm is assessed as the income of the HUF, provided the income is derived from the utilization of the funds or assets of the HUF. However, when the Karta receives a salary from the partnership firm for rendering his services, the salary is taxed as the Karta’s individual income and not as the income of the HUF, in accordance with Section 64(2) of the Income Tax Act.

Treatment of Remuneration under the HUF’s Tax Computation

The tax implications of the fee or salary earned by the Karta as a director or partner are critical in determining the overall tax liability of the HUF. The remuneration received by the Karta in his individual capacity is excluded from the HUF’s income and is not considered for computing the HUF’s tax liability. The HUF’s tax computation is based on the collective income and gains derived from the assets or funds belonging to the HUF, while the Karta’s individual income, including any remuneration received, is assessed separately under his personal tax return.

Compliance and Reporting Requirements for Karta’s Remuneration

In the case of the Karta’s remuneration from serving as a director or partner, it is imperative to adhere to the reporting and disclosure requirements specified by the income tax authorities. The Karta must accurately report the remuneration received from directorship or partnership in the appropriate sections of his tax return, ensuring transparency and compliance with the tax laws.

Moreover, the documentation and agreements pertaining to the Karta’s role as a director or partner should be maintained meticulously, including the records of fees, salary, or profit shares received. By keeping comprehensive records and adhering to the prescribed reporting guidelines, the Karta can mitigate the risk of tax audits or challenges related to the tax treatment of his remuneration.

Conclusion

The tax treatment of the fee or salary earned by the Karta of an HUF as a director or partner is governed by specific provisions under the Indian income tax laws. It is essential for the Karta to understand the distinction between his individual income and the income of the HUF, particularly when deriving remuneration from directorship or partnership activities. By complying with the relevant legal principles and ensuring accurate reporting, the Karta can effectively manage the tax implications while upholding the statutory requirements applicable to his remuneration. As the head of the family and the principal decision-maker for the HUF’s financial matters, the Karta plays a pivotal role in maintaining tax compliance and transparency in the treatment of his director’s fee or partner’s salary under Indian income tax regulations.