H.U.F

By Nikhil Thomas

HUF

HUF means Hindu undivided family. Under Hindu Law, an HUF is a family which consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. An HUF cannot be created under a contract, it is created automatically in a Hindu Family. Jain and Sikh families even though are not governed by the Hindu Law, but they are treated as HUF under the Act. A HUF is a separate entity for taxation under the provisions of Sec.2 (31) of the Income Tax Act, 1961.

Karta: Karta is the senior most male Co- Parcenor in an HUF. He is the one who manages and represents the whole HUF. It is the duty of Karta to sign on all documents on behalf of the HUF

Co-Parceners and members: A HUF, as such, can consist of a very large number of members including female members as well as distant blood relatives in the male line. However, out of this, coparceners are only those members who are within 4 degrees in lineal descendent from the common male ancestor.

Till 2005, daughters were not co-parceners of their father’s family but were only members of the family on birth. By an amendment in 2005 to the Hindu Succession act 1956 daughters also got equal rights as to sons to be the co- parcener. The relevance of concept of coparcener is that only coparceners can ask for partition. The other male family members; ie, other than coparceners in a HUF, have no direct claim over HUF property, but can claim only through the coparceners.

Steps to create an HUF

HUF is automatically formed when a person gets married and starts a family. After the HUF is formed it must be registered in its name. Below mentioned are the few important things required to form an HUF.

HUF Deed — It should have a legal deed. It is a written legal formal document on a stamp paper which should contain the details of its Karta, coparceners and its business. Here a declaration is provided by the members wherein the name of the Karta is declared and that he would have the authority of the accounts and would hold the right to govern all the transactions of the HUF accounts on behalf of the members.

Obtain PAN in the name of HUF — In Form 49A, the application for HUF PAN card can be made which can be furnished online as well as manually.

A bank account in the name of HUF –A bank account should be opened in the name of the HUF and this bank account should be used for making all investments/expenses of HUF. The HUF is also required to have a rubber stamp and all documents pertaining of the HUF should be properly stamped. This rubber stamp should be in rectangular shape as round stamps are not acceptable as per RBI Circular

How is HUF Taxed?

• HUF has its own PAN and files a separate tax return. A separate joint Hindu family business is created since it has an entity separate from its members.
• Deductions under Section 80 and other exemptions can be claimed by the HUF in its income tax return.
• HUF can take an insurance policy on the life of its members.
• HUF can pay salary to its members if they are contributing to its functioning and work of the joint Hindu family business. This salary expense can be deducted from the income of HUF.
• Investments can be made from HUF’s income. Any returns from these investments are taxable in the hands of the HUF.
• An HUF is taxed at the same rates as an individual.

The following examples shows how tax is being saved by forming an HUF

After the death of his father, Mr. Rajesh Chopra decides to start an HUF with his wife, son, and daughter as members. Since Mr. Chopra had no siblings, property held by his father was transferred in the name of the HUF. The property held by late Mr. Chopra earns an annual rent of Rs 7.5 lakhs. Mr. Rajesh Chopra has an income from salary of Rs 20 lakh. By creating an HUF, Mr. Chopra can save tax, see below.

Due to this tax arrangement, Mr. Chopra saved tax of Rs 1,54,500. Both HUF and Mr. Chopra (as well as other members of the HUF) can claim deduction under section 80C. Further income of the HUF can be invested by the HUF and will continue to be taxed in the hands of the HUF.

Disadvantages of forming an HUF

Though HUF seems like the perfect way to save tax as a family, it comes with its own drawbacks.

Equal rights of members — The greatest disadvantage of opening an HUF is that its members have equal rights on the property. The common property cannot be sold without the concurrence of all the members. Any additions to the family, by way of birth or marriage, become a member of the HUF and get equal rights. An HUF can get too large to manage.

Partition — Perhaps the worst nightmare of opening an HUF is closing it down. The only way an HUF can be dissolved is by a partition. All members have to agree to dissolve the HUF. Under a partition, assets are distributed to members which can lead to a lot of disputes and can be a lot of legal hassle.

HUF continues to be assessed as such till partition — Once an HUF is formed, you must continue to file its tax returns, unless a partition takes place. Any claim for partition is made to the assessing officer. The assessing officer, on receiving such claim, must make an enquiry after giving due notice to the members. Income from the property which was partitioned is taxed as individual income of the member. If the member forms another HUF with his wife and children, the income of the property which was transferred from the original HUF is taxed in the hands of new HUF.

Information in this blog is intended to provide only a general outline of the subjects covered It should not be regarded as comprehensive or sufficient for making decisions, nor should it be used in place of professional advice.

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