Why to open huf account?

An HUF can run its own business to generate income. It can also invest in shares and Mutual Funds. And being a separate entity, the HUF enjoys a basic tax exemption of Rs 2.5 lakh. So, imagine that you create an HUF consisting of you, your spouse and two children.

The Income Tax Act provides several opportunities for taxpayers to reduce their tax liabilities in an organised and legitimate manner. One such aspect is the creation of the HUF or the Hindu Undivided Family. HUF is governed under Hindu law board and could be formed by a married couple or by members of a joint family. HUF could be formed by two members and at least one among them should be a male member of the family. Senior most male member of the family would become ‘Karta’. Although it is governed by the Hindu law board, it can be formed by Jains, Sikhs and Buddhists as well.

For the sake of income tax, the HUF is considered as a separate entity and is therefore taxed separately. This helps to separate tax obligations of an individual from that of his family. The income tax slab for HUF is same as that of an individual, with an exemption limit of Rs 2.5 lakh and qualifies for all the tax benefits under Section 80C, 80D, 80G and so on. It also enjoys exemptions under Section 54 and 54F with respect to capital gains.

HUF has to be created keeping in mind the legal and financial requirements. A HUF is created through executing a deed, getting HUF PAN and opening a bank A/c in the name of HUF. The cost of creating a HUF is a few thousands of rupees. You next need to infuse capital to form the HUF corpus with money received as gifts from relatives or with assets received under a will or inheritance, as it enjoys tax exemption. Care should be taken that personal assets and funds are not transferred to the HUF account, as income generated from it shall later be clubbed under personal income under Section 64 (2).

The Karta of a HUF is the senior most male member of the family and in financial terms he can also be called manager of the family. In this account a corpus is created where every family member can pool their income. The corpus will be handled by or authorized to handle by Karta (head of the family). Signature of Karta will be required for every transaction from the bank. These accounts are similar to individual saving bank accounts; there will be various tax benefits that are available for an individual’s account while the income of members is being pooled in the HUF account.

Since the account is equivalent to an individual’s account there are various HUF tax benefits and a few of them are mentioned below.

Likewise, although salaried individuals cannot divert their salary into the HUF, they can benefit if they plan to earn additional income, which they can claim in the name of a HUF, thereby reducing his taxable income. For instance, if an individual has a salary income of Rs 12 lakh and is earning additional business income of Rs 6 lakhs. Now, if he creates an HUF and does business in the name of a HUF, then this total income will be taxable under HUF and he could reduce his tax liability after availing benefits under various sections which would otherwise not be allowed, had he earned it in his own name.

Rental Income from property: Rental income from a property could be received on behalf of a HUF instead of an individual account.

Business Income: Profits generated out of the family business, in the name of a HUF, shall be taxed accordingly and exemptions will give more leverage on tax saving.

Remuneration to Karta and members: Remuneration to Karta and other family members is an allowable deduction from income of an HUF.

Loan to HUF members: If the business, capital or investment of the HUF is expanding, then such expansion can be done in the individual names of the members of HUF by giving loans to the members from the HUF. The HUF may or may not charge interest on the loans given.

Family Settlement or Arrangement: The sole purpose of the family settlement should be to settle existing or future disputes regarding property, amongst the members of the family. Since this arrangement does not involve transfer, it would not attract gift tax, capital gains tax or clubbing. In a family arrangement, tax incidence is considerably reduced or it may even become nil.

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ARN: ED/08/22/28497

Published on Thursday, December 6, 2018 by Chittorgarh.com Team | Modified on Sunday, April 19, 2020

HUF (Hindu Undivided Family) is designed for undivided Hindu families who earn their income jointly rather than an individual. Since the income of these families is joint, it's not easy to divide it among the family members for tax purposes. HUF helps to manage that.

HUF is a separate entity that can be formed by the members of a Hindu family which includes a common ancestor and all his lineal male descendants and their wives and unmarried daughters. They are called coparcener. Other distant relative e.g. brother-in-law, sister-in-law etc. can also be deemed member of HUF. The deemed members cannot demand the partition of HUF.

At least 2 family members have to join to form a HUF. HUF cannot be transferred or sold or break into parts without the consent of all coparcener.

The Income Tax Act and Wealth Tax Act treat the HUF as an independent body for investment and taxation. HUF has a separate PAN card and a bank account. A separate tax return has to be filed for the HUF. The HUF enjoy all deductions and exemptions under the Income Tax Act free from the income and tax liabilities of its members.

HUF account can be formed by the Hindus and Hindu dissenters including Brahmo Samajist, Arya Samajist, Virashaiva, Lingayat, Prarthna Samajist, Jains, Sikhs, and Buddhist families. Muslim or Christian families cannot form the HUF.

Note that the HUF is not a recognized entity in Kerala state. The Kerala State Legislature abolished HUF laws by The Joint Family System Act, 1975.

The Karta is the manager of the HUF. He takes care of day-to-day activates of HUF. He is the authorized signatory and the face of the HUF in all the dealings.

Who can be Karta of a HUF?

What are Karta powers in HUF?

Death of Karta in HUF

As HUF Karta is the manager of a HUF, the death of the Karta is a major event for HUF.

The HUF's PAN Card, Bank Account, Demat Account, Trading Account, Properties etc. are directly linked to Karta's identity. He is the face of the HUF. His address, phone number (for OTP) and signature are on all the accounts and assets held under HUF. Technically, his KYC (Know your customer) detail is linked to all the HUF accounts.

In case of death of Karta, following things has to be done to make another person as the Karta of HUF:

Despite accounting and managing hassles, there are tons of advantages of a HUF account.

A Hindu Individual can open a HUF as soon as he gets married and when the child is born, he will automatically become a member of his father's HUF. Under the Income Tax Act, HUF is treated as a separate entity. This allows members of the HUF to save taxes by dividing their income. Let's understand that with an example.

In 1st scenario (without HUF) he paid Rs 6.81 Lakh on total gross income of Rs 30 Lakh.

In 2nd scenario (with HUF) he paid Rs 4.57 Lakh (3,72,345 + 84,975) on same total gross income of Rs 30 Lakh.

By using HUF account Mr. Mahesh saves Rs 2.24 Lakh of taxes in a year. This is a saving of over 30% in tax paid.

With little account overhead, Mr. Mahesh is able to save quite a bit of tax.

Are you ready to open HUF Account to reap the tax benefits? Simply follow the steps below to form a HUF:

Firstly, form a Deed on a Stamp Paper mentioning names of Karta and Coparcener. The Deed acts as the proof of the existence of the entity that has been formed. It is not required but it helps in case of disputes.

It's a very simple process to form a deed for HUF. It requires a one-page letter on a stamp paper signed by the Karta and the Coparceners.

Buy a Rs 100 stamp paper and print the below HUF Creation Deed. Get it signed by all the members of the HUF and 2 witnesses. That's it.

Though it's not required, if you or the family members wish to register this agreement, you could do that by visiting your nearest registrar.

Note: It is a document which represents the understating between the members. You could also add more information to it (i.e. limiting the power of Karta) or consult a local attorney for more specific clause you would like to add to it.

HUF Formation Deed Sample Document (Print on stamp paper)

Download HUF Deed Document in MS Word Format

DECLARATION

I, ________________ son of __________________ residing at ______________________ aged ___Adult do hereby declare-

For __________________ HUF

KARTA

WITNESS:

Following the formation of a deed, you have to get a PAN Card on the name of HUF.

The HUF is a separate entity like a company or partnership firm. It is mandatory by the law in India to get a PAN card for HUF. The Karta has to apply for HUF PAN using Form 49A. The application can be made online as well as offline.

The name on the PAN card is mentioned as ' HUF' i.e. Sanjeev Singh HUF. The application for PAN card has information and signature of the Karta.

Documents required for HUF PAN Card Application

If all the documents are in order, the PAN card would arrive in around 21 days after submission.

Once you get the HUF PAN Card, the next step is to open a HUF Bank Account. It is mandatory to open a separate bank account on the name of HUF. This bank account must be strictly maintained for HUF purposes, and shouldn't include the savings of any member as the assets in HUF account are equally owned by all the members.

Features of HUF Account

Documents required for HUF Bank Account

List of documents required to open a HUF account:

A HUF Demat Account and the HUF Trading Account are required for investments in the stock market, Mutual Funds and to manage securities of the family. Similar to HUF Bank Account, these two accounts are opened and managed by the Karta of HUF on behalf of the members of HUF.

HUF Demat and Trading accounts can be opened with any stockbroker in India.

Benefits of HUF Demat Account

List of documents required to open a trading/demat account

To open HUF Demat and trading account, Karta of HUF has to provide his documents and sing it on the forms. The following documents are required:

• No outside members other than family members can be introduced to the HUF.
• While the Karta has all the power he also has the burden of unlimited liability.
• Also, the absolute dominance of the Karta overall business and financial decisions make cause conflict among the HUF.

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