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:
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.
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.
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.
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:
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.
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.
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