Part 1- What is HUF & How to create HUF?
Tax Planning is a part of overall Financial Planning and HUF is a good way of planning and reducing your tax liabilities. But Many times I have seen people are confused about formation and functioning of Hindu Undivided Family (HUF) and as a result are not able to take the benefit of HUF as a separate entity and save their taxes. So this article is an effort to clarify the basics of HUF in the eyes of Income Tax and how to utilize HUF as a Tax Planning tool.
What is HUF?
In India, Hindus normally used to live in joint families and run joint family business. Still we find many families, where people live together and run a family business. In such case, a question arises How to tax the income earned from that family business, I mean in which family member’s head this income should be taxed? So to avoid this confusion, In Income Tax Act a separate entity is created in the form of HUF to tax such Joint Family Income under a separate head.
HUF is a separate legal entity in the eyes of Income Tax Act like individual and is also given a separate PAN Card. Assessment of income of HUF , exemptions , deductions etc. Is done separately in the same manner like an Individual. For example, in my case my Individual income will be calculated and taxed separately in my individual name “ Prakash Hariram Lohana “ but my Joint family income will be taxed in the name of my HUF that is “Prakash Hariram Lohana (HUF)”.
Who can create HUF?
Benefit of HUF under income tax act is available to Hindus only and for this purpose Hindus includes Jains, Buddhist and Sikhs also. So people following other religions like Muslims and Christians cannot form HUF as they are not considered Hindus as per law for this purpose.
How to create an HUF?
A HUF automatically comes into existence once a person gets married and starts his family. There is no necessity to have a child for creation of HUF.
Though HUF is being created by the marriage, it is advisable to make an agreement for HUF as this will be required by banks at the time of Bank account opening and Income tax department at the time of application of PAN Card of HUF.
HUF can be created in three steps, which are as under.
1. Creation of HUF Deed :
HUF is actually created automatically when a person gets married. But still it is advisable to create an agreement because when you will go opening Bank account opening with bank or when you will apply for PAN card with Income Tax department they will ask for HUF Deed.
HUF Deed is a written formal document on a stamp paper stating the names and age of the karta and the Coparceners (Members) of the HUF. The eldest member being the Kart of the HUF. HUF deed should be on 100 Rs. Stamp paper and should be notarized.
HUF deed also includes the details of the capital with which HUF is initiated. For starting of HUF one can take a gift of very small amount from anyone.
2. Application for PAN Card
As HUF is a separate entity in the eyes of Income Tax Act, separate Permanent Account Number has to be taken in the name of HUF and after one receives separate PAN for HUF separate Income Tax Returns has to be filled for HUF. For this you will require a stamp of karta of HUF. The stamp must be in rectangle shape with HUF marked after the name of the karta. For example if name of the karta is Prakash Hariram Lohana the HUF stamp would be as under.
This stamp will be required at the time of all the transaction for authentication including for application of PAN card. For PAN card of HUF one has to apply in form 49A. Find here with the form of the PAN application Form 49A.
3. Opening of Bank Account:
Once the Permanent Account Number is received, next step is Opening of Bank account.
Kart will be the signing authority for the opening of bank account.
Once these three formalities are completed and Bank account in the name of HUF is opened. HUF has become a separate legal entity and one can start transactions in the name of HUF.
From above discussion it is clear that creating HUF is not as difficult as it seems. In my next post I will be discussing other Legal aspects of HUF and How to plan your taxes utilizing HUF as a separate entity.