HUF stands for Hindu Undivided family and it is governed under Hindu law board. It could be formed by a married couple or by members of a joint family. HUF could be formed by two members, at least one of which 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.
The Income Tax Act recognizes the HUF as an independent assessable or taxable entity. Hence, HUFs enjoy all deductions and exemptions under the IT Act independent of the income and tax liabilities of its members. A separate Income Tax Return is filed under Income Tax Act. This helps to separate tax obligations of an individual from that of his family. Tax slabs of HUF are same as that of an individual.
An HUF consists of:
Karta: Karta is generally the father of the family or the senior most person of the family who has the right to do all the things for the family and take all the decisions on the behalf of the family.
Co-Parceners: Coparcener is the person who has the right to demand the share of the property of family if he/she wants to part away with the family with his/her share. All the coparceners have equal right in the HUF.
Supreme Court has clarified two points in respect to rights of Daughters in HUF:
• coparcenary rights are acquired by daughters on their birth; and
• fathers need not have been alive when the 2005 amendment to the Hindu Succession Act 1956 was passed.
Not all members of the HUF are its coparceners. The co-parcenery extends to four degrees down the family hierarchy in the following manner:
1st degree: Holder of ancestral property for the first time.
2nd degree: Sons and daughters
3rd degree: Grandsons.
4th degree: Great grandsons.
HUF has to be created keeping in mind the legal and financial requirements.
Formation of HUF can be done in 3 steps which have been summarized below:
Step 1: Preparation of Deed:
It is a formal document with Stamp paper of respective stamp of considerable value as per the state of registration. Deed shall state the names of the Karta and the Co-parceners (Members) of the HUF along with a declaration filed by all the members and co parceners.
Step 2: Apply for PAN Card:
On registration of Deed, a HUF can apply for PAN of its own. Once the PAN Card has been allotted, the HUF can claim benefit of income tax slab rates and deductions and exemptions which are available to an Individual.
Step 3: Open bank account:
With the help of above documents a HUF can open a Bank Account through which it will make all the transaction. A HUF Account can be opened in any bank account. The UF would also be required to have a Rubber Stamp of the HUF and all documents pertaining of the HUF should be properly stamped.
Although HUF doesn’t require any specific registrations to operate a business, it is advised to obtain the following registrations to make the business function smoothly.
Registering under MSME Act (Udyam)
An HUF can get registered under the MSME Act by applying for Udyam Registration number. Udyam registration provides various benefits which are provided by Government authorities for promoting specific industries.
GST Registration is required if annual turnover is more than Rs. 20/40 lakhs. Also, if the HUF is doing online business then it is required to get a GST number.
The major benefit in opening a HUF is that it can provide you with additional tax benefits that may help reduce your tax burden. Some of the benefits available have been summarized below:
Income tax benefits
An HUF is a separate entity from a legal point of view and the HUF has its separate PAN card. 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. In addition to income tax benefits you enjoy individually, you can also avail of an additional basic income tax exemption of Rs 2.5 lakh each year.
Owning a house
Under current income tax laws, if you own more than one self-occupied property, only one of them can be claimed as a self-occupied property. The rest are ‘deemed to be let out’ and you have to pay tax on notional rent. However, an HUF can own a residential house without having to pay tax. In addition, it can also avail of a Home Loan to purchase a residential property and get tax benefits up to Rs 1.5 lakh under Section 80C of the Income Tax Act for loan repayment and up to Rs 2 lakh for interest thereon.
Provisions of the Income Tax Act allow individuals to claim tax benefits on certain payments they make during a year. Similar benefits are applicable for an HUF. For example, an HUF can pay Life Insurance premium for individual members, and claim tax benefits under Section 80C. The maximum amount that can be claimed as a deduction under this section is Rs 1.5 lakh.
An HUF is allowed to make investments in tax-saving Fixed Deposits and Equity Linked Savings Scheme (ELSS) to earn tax benefits of up to Rs 1.5 lakh under Section 80C. And while an HUF cannot open a Public Provident Fund (PPF) in its name, it can claim tax deductions for the amount deposited by the HUF in respective PPF accounts of its members.