What is HUF?
Hindu Undivided Family (HUF) is not defined under the Income Tax Act but is covered under the Hindu Law. By definition, HUF consists of all individuals who are lineally descended from a common ancestor and also comprises of unmarried daughters. HUF is not formed by a contract but by the status of a family i.e., it is created automatically in any Hindu Family. Having a common ancestor is a pre-requisite to form a HUF.
How to Form a HUF?
Minimum two members are required to form a HUF, constituting a joint family. A HUF is automatically formed when a person marries and start their family. It is not compulsory for the couple to have kids. Owning an estate or a property is also not mandatory to form a HUF. The Hindu Law though does not govern Buddhists, Jains, and Sikhs; it can be treated as a HUF for taxation purpose. In HUF, the income generated belongs to the whole family, instead of a specific individual. Thus, this income is then taxed in the hands of the HUF. Naturally, HUF is treated as a distinct entity for tax purposes. HUF need to have a separate PAN card and need to file separate IT returns.
One of the major benefits of the Hindu Undivided Family is that it is considered a separate legal entity. This entitles HUF to obtain a separate PAN card and bank accounts in the name of the HUF. Once a HUF is formed, typically the oldest member of the family becomes the “Karta” and is provided with an additional exemption. In addition, the tax slabs are lower when compared to that of regular corporates. Until January 2016, women were not eligible to be the Karta of a HUF. However, the Delhi High Court, in a landmark case, gave the decision in favor of a woman being the Karta of HUF. The decision is yet to be implemented in the Income Tax Act.
Steps to Create HUF
There are 3 steps involved in creating a HUF. They are mentioned below:
Step 1: Create a HUF Deed
It is a formal legal document on a stamp paper which clearly states the names of the ‘Karta’ and the co-parceners (other members). In addition to this, another declaration is provided by each family member where they declare the name of ‘Karta’ and agree that
- the ‘Karta’ has the right to monitor all the transactions of the HUF account on their behalf
- the members declared in the deed are the only members of the HUF
- the ‘Karta’ has the authority of the HUF account
Step 2: Apply for HUF PAN Card
The HUF is considered as a separate entity for tax purposes, it needs to have a separate PAN card. You need to fill the form 49A to apply for the PAN Card. It can be done both offline as well as online.
Step 3: Open HUF Bank Account
A HUF needs to have a separate bank account which will get all the payments. It can be opened in any bank.
How is HUF Taxed?
• HUF is eligible for deductions under section 80 and other relevant exemptions
• Allowed to take insurance policies for its members
• Can also pay salary to its members should they contribute to HUF functioning
• Investment is allowed from HUF income and returns from such investments are taxable.
Income of HUF
Any income that is derived from the below may be regarded as income of HUF:
• Profit from business including profession
• Income from house property
• Capital gains
• Other sources
Given that the HUF is a separate legal entity; it is not entitled to any salary income. Also, any income that is derived from investments made by the HUF is assessed and taxed separately.
Who should opt for HUF?
HUF arrangement suits those taxpayers who have income from ancestral property and expects to inherit these assets (both real and financial). A taxpayer will be able to divert the inheritance to the HUF account and thus preventing personal tax liability from increasing. In addition, HUF is also beneficial to taxpayers with a higher savings rate.
Legal formalities involved while forming a HUF:
• Form corpus – A capital asset can be used to form the HUF. It can be any ancestral property, assets received as a gift from relatives or through a will.
• Register a deed – A deed is required on stamp paper declaring the formation of the HUF. It should include information of the Karta and the co-parceners. In addition, sources of funds in the corpus are also mentioned. Once the declaration deed is made, the Karta can apply for a permanent account number (PAN) for the HUF as a separate legal entity.
• Opening bank account – Once the PAN is allocated, open a bank account in the name of the HUF.
We hope that you have got a detailed insight on the Hindu Undivided Family and its working. Should you wish to know more about HUF or any tax-related matter with HUF, feel free to connect with us and we shall be glad to assist.