The expression “Hindu Undivided Family” has not defined under the Income Tax Act or in any other statute .HUF stands for Hindu Undivided family 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, at least one among whom 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. Membership into a HUF does not come from a contract but from status under hindu law.

The essentials are:-

(i) One should be Hindu, Jains,Sikhs and Buddhists are considered as Hindus but not Muslims or Christians

(ii) There should be a family i.e group of persons – more than one and

(iii) They should be undivided i.e living jointly and having commonness amongst them.

All these three essentials are cumulative. It is a body consisting of persons lineally descended from a common ancestor and includes their wives and unmarried daughters, who are living together, joint in food, estate and, worship (not now necessary). The daughter, on her marriage, ceases to be a member of her father’s HUF and becomes a member of her husband’s HUF. However, after 1-9-2005, daughter married or unmarried, is a coparcener like a son.

Here are the legal formalities involved in forming an HUF. 

Incorporation of HUF

1. Form corpus:-

Use a capital asset to establish the corpus of the HUF. This can be ancestral property, assets gifted by relatives and friends, or received by the HUF through a will. If you give a personal asset to the HUF, the income will be clubbed with your own. Gifts of over 50,000 a year received by HUF will be taxable. The best way is for the HUF to receive assets as part of a will.

2. Make a deed:-

You have to prepare a deed on stamp paper declaring the formation of the HUF. It should have all the details, including the name of karta, co-parceners , address and source of funds in the corpus. Once the declaration deed is made, the karta should apply for a permanent account number (PAN) for the HUF. This is mandatory because all financial transactions must carry PAN.

 3. Open bank A/C:-

After you are allotted a PAN, open a bank account in the name of the HUF. It is also advisable to get some stationery printed for official communication. The HUF is now functional . The karta will have to invest in taxsaving instruments and file tax returns on behalf of the HUF.

Advantages:-

• Every member of the family can deposit their income in the common corpus.
• Single person’s authority while participation from entire family.
• Gifts collected up to a worth of Rs 50,000 will be tax free. A father who owns a HUF account can gift a property or money of higher worth to a son who owns a smaller HUF account; but he should specify that the gift is for the son’s HUF and not to him as an individual. Under section 64(2) and 56(2) tax benefits can be enjoyed in such instance.
• Corpus can be used for investment in tax free money instruments.
• Corpus can be divided only on agreement of every coparcener of the family.
• The Income Tax Act and Wealth Tax Act recognise 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.
• Tax Saving- For example- an ancestral property that yields rental income. Under normal circumstances, the rent will be attached to a person’s income and will be taxed according to that individual’s tax slab. However, if it is transferred to an HUF, the income will be that of the HUF’s and will be taxed separately. Let’s take an example. Say, person A earnsRs.9 lakh per year and has an ancestral property, which yields Rs.3 lakh as annual rent. If A got the property from his father, while calculating his tax liability, both incomes will be clubbed and taxed in his hands. Assuming that A has no investments and not considering education cess and surcharge, he will be subject to a tax of Rs.1.85 lakh (30% slab for assessment year 2015-16). If the property is transferred to an HUF of which A is, say, the karta, then under the same assumptions, A will pay Rs.1.05 lakh as individual tax and the HUF will pay Rs.5,000 as tax. So, in all there will be a tax saving of Rs.75,000. The rent becomes tax-free in the hands of the karta, which is A here, and for the other members as well.

Disadvantages

Though creating and registering an HUF is fairly easy, complications may arise later.

• The first problem is that once a property is assigned to an HUF, all coparceners have equal right to it. So, it cannot be transferred or sold without the consent of all coparceners, and even the karta cannot transfer it to anyone without everyone’s consent. “Partition of real estate belonging to an HUF can be a nightmare, and more often than not, it leads to disputes and court cases.
•  Also, an HUF cannot be broken into parts; all members have to agree to dissolve an HUF.
• If an HUF has only a few members, things may run smoothly. Problems mostly appear when the number of coparceners increases. Since all lineal descendants are part of an HUF, every child, whether boy or girl, who gets added to the family, becomes a part of the HUF.
• Apart from HUFs becoming too large, the goal for which it was created has to be clear. “If the purpose is only tax saving, it may work only for the initial years. As income and number of members grow, complications, too, increase. If the income tax authorities feel that the HUF has been created to launder money, it may choose to take suitable action against it.
• At the root of many problems is poor understanding of the laws that govern HUFs. These laws are not codified and are read along with the Hindu Succession Act and the Income-tax Act. “Most of the younger generation does not understand these laws, especially because laws around HUFs are getting complicated,”
• HUFs are an Indian phenomenon; some family members move abroad either to study or work and the computation of income may be difficult as many countries do not recognize HUF.Taxation of assets can also be an issue as personal funds put into an HUF will actually be clubbed with the coparcener’s individual income, which may not work if the original purpose of starting the HUF was tax-saving.

KEY POINTS IN CREATION OF HUF AND FORMAT OF DEED FOR CREATION OF HUF

• Under the Income Tax Act, an HUF is a separate entity for the purpose of income tax return.
• The same tax slabs are applicable to HUF as to individual assessee.
• You can not transfer your own assets/money into HUF.
• If you have ancestral property and earning some income from this property, then it is better to transfer this asset to HUF and save tax up to exemption limit applicable to individual.
• You can transfer the money received on sale of ancestral property /assets into your HUF.
• The income from property of HUF can be further invested in instruments such as shares, mutual funds, etc. and will be assessed under HUF.
• Existence of property or multiple members is not a pre-requisite to create HUF. A family which does not own any property may still have the character of Hindu joint family. This jointness is understood in terms of faith and food. This is because as a Hindu is born as a member of the joint family.
• Any gifts received by the members of HUF (birthday, marriage, etc.) can be treated as assets of HUF.
• The HUF is taxable as separate person under income tax hence one can save tax from basic exemption of Rs. 2.5 lakh. HUF will also gain from the tax slab structure of computing income tax.
• Apart from basic exemption of Rs. 2.50  lakh, section 80C deduction up to Rs. 1.50 lakh is also available.

For example, if you are in 30% tax bracket, then approx tax saving by creating an HUF will be as follows:-

Basic exemption up to Rs. 2,50,000 = nil

Rs. 2,50,000-5,00,000 @10% = Rs. 25,000

Rs. 5,00,000-10,00,000 @20% = Rs. 1,00,000

80C deductions Rs. 1,50,000

Therefore total tax payable for HUF on income of Rs. 6,50,000 is only Rs. 25,000.

If this income of Rs. 6,50,000 is taxed in individual hand @ 30% tax due is Rs. 1,95,000.

Hence, you can save a total of Rs. 1,70,000 by creating an HUF and transferring ancestral property income and other income under HUF. 

FORMAT OF HUF CREATION DEEDS

FORMAT-I

DECLARATION

 I, ____________________________ son Of ___________________________________ Residing at ____________________________________________ aged ___Adult do hereby declare-

That I am Karta of ____________________________________________

That I received on behalf of the H U F gift of Rs. ___________ by way of CASH/CHEAUE from my FATHER ________________________________(name of relative of karta of HUF)   on  dt. _______________ this formed the corpus of the HUF. 

That the HUF at present is consisting of the followings members-

 I) Shri _____________________, Adult, Residing at _________________

  II) Smt. _____________________, Adult, Residing at _________________

III) Kumari _________________-Minor, Residing at ___________________

 That the above statements are true to the best of my knowledge & belief. Declare this on  _________________

 WITNESS:                                                                              Signature

1. ————————————–                                              ————————————

2. ————————————–                                              ————————————                             

FORMAT- II

 DECLARATION OF GIFT MADE BY ________________________

TO THE HINDU UNDIVIDED FAMILY OF ___________________

I, _____________________________, residing at _______________________ ____________________________________________________________, do hereby declare and affirm as under:

1.       That out of natural love and affection borne by me towards the Hindu Undivided Family of ______________________________,  I have made a gift of Rs.______ (Rupees _________________ only) as per the following details:

By Cheque No.________, dated __________, drawn on Bank ____________________,  ________________ Branch, in favour of ________________________ HUF.

2.       The above Gift has been duly accepted by ________________________,  as Karta of his Hindu Undivided Family and has been duly acknowledged hereunder.

3.       This Declaration of Gift is made to record the fact that I have made this Gift in favour of the Donee as above, who now has the absolute right, title and interest in the gifted amount.

Date: ___________, 200__                                 ___________________

                                                                        (Signature of the Donor)

ACKNOWLEDGEMENT OF GIFT

 I, ________________________, hereby acknowledge having received the above gift made to my Hindu Undivided Family by _________________________.

Date: ___________, 200__                                 ___________________

                                                                          (Signature of the Donee as Karta of his HUF)

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