HOW TO CREATE HINDU UNDIVIDED FAMILY (HUF)

A Hindu Undivided Family under the Income Tax Act, 1961, is treated as a separate taxable entity. The term ‘person’ as defined u/s 2(31) of the Income Tax Act includes a HUF. Since, HUF has a separate tax identity distinct from the family members of the HUF, it can be used suitably for tax planning purposes by the taxpayers. In this article, we will discuss that “What is an HUF” and “How to create HUF”.

What is HUF?

An HUF means Hindu Undivided Family. Hindu Undivided Family consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters.  Hindu Undivided Family is treated as a separate taxable person under Income Tax.

What are modes of creation of HUF?

There are various modes of creation of an HUF as below:

• Creation of HUF by way of Gifts
• Doing joint labour for the benefit of HUF
• Partition of a larger HUF
• Inheritance through a specific bequest under a will
• Creation of HUF by reunion of separated coparceners
• Bringing individual property to the family kitty

However, in this article, we will restrict our discussion to ‘Creation of HUF through gifts’ only as it is one of the most common ways for creating HUF.

Who is ‘Karta’?

The ‘Karta’ is the elder most male member of the family who is responsible for management of the affairs of the family. In simple terms, ‘Karta’ is the head of the family. Only a family member with coparcenary rights can become ‘Karta’. However, after Hindu Succession (Amendment) Act, 2005, a daughter has also been given coparcenary rights in the HUF property.

How to form an HUF by Gift?

Step-I: Choose suitable name for HUF: Generally, there is a fixed format for name of HUF. For example, if the name of ‘Karta’ is Ramesh Gupta, then the name of HUF will be “Ramesh Gupta HUF”. It is advised to avoid the use of bracket (HUF) or dot (H.U.F.).

Step-II: Prepare a rubber stamp of HUF with signatory as ‘Karta’ because rubber stamp will have to be affixed on all documents relating to HUF. For example, in case of ‘Ramesh Gupta HUF’, prepare rubber stamp as:

Step-III: Create a HUF creation deed:

• It is to be noted that HUF deed is not a compulsory instrument but it is advisable to create HUF deed as it will help in registering PAN of HUF.
• For this purpose, you are required to prepare a deed on non-judicial stamp paper making declaration for formation of HUF.
• HUF creation deed will consist of following details:
  (a) Name & address of Karta and his father’s name
  (b) Name & addresses of co-parceners and other family members
  (c) Source that will form corpus (capital) of HUF: In case of Gift, details of gifted amount along with details of cheque no. will be shown in the “HUF creation deed” as corpus.
  (d) A declaration by ‘Karta’ as regards intention of forming HUF.
  (e) The deed should be notarized from a registered notary public.

Step-IV: Gift from donor: Arrange gift from any family member, ‘Karta’ or relatives or family friends. A proper ‘gift deed’ is advised to be executed on non-judicial stamp paper as a valid instrument acknowledging the gift by the donor. It shall be noted that gifts over an amount of Rs. 50,000 received by an HUF are taxable. So, you should plan accordingly. You may also get ‘gift deed’ notarized from the notary public.

Step-V: Apply for PAN: The ‘Karta’ shall apply for PAN of the HUF in Form No. 49A to the Income Tax Department. HUF creation deed can be submitted as a valid proof for obtaining PAN of the HUF. You will be compulsorily required to obtain PAN for opening bank account of HUF. Further, PAN will be required for filing income-tax return of HUF or for making any investments in the name of HUF.

Ste-VI: Open bank account: After allotment of PAN, you may open a bank account in the name of HUF. Deposit the cheque received in respect of gift in Step-IV in the newly opened bank account. Now, the HUF is fully functional.

What are the tax implications in case of an HUF?

• As discussed above, HUF is treated as a separate taxable entity under Income Tax Act. Therefore, An HUF can have its own PAN and file its income tax return separately from ‘Karta’ and other family members.
• An HUF can claim deduction under section 80 (Chapter VIA) of the Income Tax Act.
• Any gifts received by an HUF over Rs. 50,000 shall be taxable in its hands.
• HUF can take insurance policy on the life of its members and claim deductions u/s 80C towards payment of insurance premium thereof.
• HUF can make any investments out of its income. 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.
• An HUF can avail benefit of deduction u/s 80C to the extent of Rs. 1,50,000.

Other points of consideration:

• One person cannot form an HUF.
• An HUF is automatically created at the time of an individual. HUF contains a common ancestor and all of his lineal descendants, including their wives and unmarried daughters. After 01-09-2005, the daughter (married or unmarried) is a coparcener like a son.
• Hindus, Buddhists, Jains and Sikhs can form HUFs.
• You should not transfer your own assets into HUF as it might attract clubbing provisions under Income Tax. Any income derived by HUF from such property shall be taxable in your hands.

For any help in HUF formation you may whatsapp or call on: 9660930417

Also read:Can a female become karta of HUF