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How to Create Hindu Undivided Family (HUF)
The term “Person” is defined under section 2(31) of the Income Tax Act so as to include the Hindu Undivided Family (HUF). HUF has been recognized as a separate taxable entity under the Income Tax Act, 1961. As a result, HUF is allowed to file its separate income tax return for its income. HUF consists of all persons lineally descended from a common ancestor & includes their wives and unmarried daughters. Since HUF is a separate tax identity distinct from the family members, it can be used legally for tax planning purposes. HUF is entitled for a separate basic exemption limit of Rs. 2.50 Lakh and can also claim various benefits like deduction U/s 80C towards LIC, U/s 80D on mediclaim, exemption U/s 54, etc. One of the most common queries which is often raised is “How to create a HUF File?”. Before we discuss about the mode of creating the HUF, let us know few important thing about HUF:
- One person cannot form an HUF.
- Hindus, Buddhists, Jains and Sikhs can form HUFs.
- ‘Karta’ is considered as the head of the family. The ‘Karta’ is the eldest male member of the family who is responsible for management of the affairs of the family. It’s only the person with coparcenary rights in the family who can become the ‘Karta’ HUF.
- Earlier, only male members were entitled to be the Karta. However, after the Hindu Succession (Amendment) Act, 2005, a daughter has also been given coparcenary rights in the HUF property. In short, after 01-09-2005, the daughter (married or unmarried) is a coparcener like a son.
How to create the HUF?
HUF is not a creation of law like a partnership firm which is created by executing the partnership deed or a company which is created by registering it with the registrar of Companies. HUF doesn’t come into existence by agreement or by any contract. If there is a family consisting of more than one member with at least one coparcener, HUF can be said to be in existence in such a case. The real question which one wants to know is how the HUF can have the corpus (capital) of the HUF & can be used as a tax planning tool for income tax law.
There are various modes of having the corpus in the HUF, as under:
- Creation of HUF by way of Gifts
- Inheritance through a specific bequest under a will
- By doing joint labour for the benefit of HUF
- Partition of a larger HUF.
- Creation of HUF by reunion of separated coparceners
- Bringing individual property to the common family kitty.The easiest way to have the corpus of the HUF could be by way of accepting the Gift. This is one of the most common ways of ensuring the income tax file of the HUF as well.
Step Wise mode of Having Income Tax file of Separate HUF through Gift:
- Keeping the name for HUF:
Normally, there is a fixed format for the name of HUF. For example, if the name of ‘Karta’ is Naresh Bhagirath Jakhotia then the name of HUF may be “Naresh Bhagirath Jakhotia (HUF)”.
- Making the Rubber Stamp for HUF:
One may prepare the rubber stamp of the HUF with the name of the HUF. After providing the space for the signature, the word “Karta” is to be added therein. The word Karta may be preceded with the name of Karta as well in the rubber stamp.
- Obtaining the PAN of the HUF:
One should apply for the PAN in Form No. 49A. For PAN Application, the HUF Declaration Deed as discussed below may also be used.
- Opening the Bank Account:
Though not compulsory, still the bank demands the PAN for opening a bank account of HUF. One can approach the bank for opening the bank account. The bank may insist on the details of the Member of the HUF and this may be furnished by way of a declaration letter signed by the karta of the HUF. Though, HUF deed is not a compulsory instrument but it is advisable to have it have HUF Declaration Deed on stamp paper with the following details:
(a) Full Name, Address & Age of Karta with his designations.
(b) Name & addresses of coparceners and other family members.
(c) A declaration by ‘Karta’ as regards the intention of forming HUF.
(d) The deed may be notarized from a registered notary public.
- Getting the Corpus by way of Gift:
After all above formalities, the karta can receive the gift for the benefit of the HUF. The gift, advisably, may be accepted from any relatives of the Karta or any relative of the member of the HUF. For this, it is advisable to receive the gift by executing the gift deed conveying clearly that it is the gift for the benefit of the HUF. One may note that gifts of an amount up to Rs. 50,000 received by an HUF are totally tax free. However, if the amount exceeds Rs. 50,000/- then the entire amount is taxable.
- Income of HUF:
After the corpus of the HUF is created, one can invest it and can plan for its independent source of income. One can start the business also in the HUF with the available corpus and borrowed fund. Income of such business will be taxable in the hands of the HUF only. HUF can also invest the fund in the share market and can also do share trading. Any income arising on investments so made shall be taxable in the hands of HUF. An HUF is taxed at the same rates as applicable to an individual. However, HUF is not eligible for rebate u/s 87A.
- Caution for Clubbing Provision:
Karta or Members of the HUF should not give their money or assets to the HUF without interest as it might attract clubbing provisions under Income Tax. Any income derived by HUF from such money or property is taxable in the hands of the lender only by virtue of the clubbing provision in the Income Tax Law. However, the Karta/Member can give the loan to the HUF on interest which can be utilized by HUF for business or other income earning avenues. In such a case, the interest paid by the HUF to its member shall be available as deduction and the income of the HUF will not be subject to the clubbing provision.
Above is just a small glimpse which may be relevant for various readers who are not able to explore HUF for tax planning. Needless to say, HUF is a powerful tax vehicle & its recognition as a distinct unit for tax policy u/s 2(31) of the Income Tax Act-1961 provides ample opportunity to save tax.