1. What is a Hindu Undivided Family (HUF)?
Hindu Undivided Family is a family which is not divided. You can save taxes by creating a family unit and pooling in assets to form a HUF. HUF is taxed separately from its members. A Hindu family can come together and form a HUF. Buddhists, Jains, and Sikhs can also form a HUF. HUF has its own Different PAN and files tax returns independent of its members.
By definition, HUF consists of all individuals who are lineally descended from a common ancestor and also comprises of unmarried daughters. HUF is not formed by a contract but by the status of a family i.e., it is created automatically in any Hindu Family
2. Income tax benefits after creation HUF.
HUF is a separate entity from a legal point of view. Here, individual members of the family have PAN cards, and the HUF has its separate PAN card. 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( at present). So, imagine that you create, HUF consisting of you, your spouse and 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.
2.1. Health Insurance
You can claim a deduction of Rs 25,000 per year on premiums paid for Health Insurance for your family under Section 80D. However, with the rise in Health Insurance premiums, this limit can be insufficient when you want to provide decent health coverage for your family. Here’s where HUF can come to your rescue. You can claim additional tax benefit of up to Rs 25,000 on Health Insurance premiums paid during the year for family members of the HUF. If the person is a senior citizen, the limit goes up to Rs 50,000.
2.2 Life Insurance
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.
2.3 Investments
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.
2.4 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.
3. Benefits of Making HUF
3.1 Rental Income from the property: Rental income from a property could be received on behalf of a HUF instead of an individual account.
3.2 Business Income: Profits generated out of the family business, in the name of a HUF, shall be taxed accordingly and exemptions will give more leverage on tax saving.
3.4 Interest Income: All the interest income received to the HUF will be treated as income of HUF.
3.5 Parental property Income can be taxed here as joint property of the family.
3.6 Share trading Income can be separately treated here and offer for taxation.
3.7 Remuneration to Karta and members: Remuneration to Karta and other family members is an allowable deduction from income of an HUF.
3.8 Loan to HUF members: If the business, capital or investment of the HUF is expanding, then such expansion can be done in the individual names of the members of HUF by giving loans to the members from the HUF. The HUF may or may not charge interest on the loans given.
3.5 Family Settlement or Arrangement: The sole purpose of the family settlement should be to settle existing or future disputes regarding property, amongst the members of the family. Since this arrangement does not involve the transfer, it would not attract gift tax, capital gains tax or clubbing. In a family arrangement, tax incidence is considerably reduced or it may even become nil.
3 a . How to Create an HUF Account
Name: As is the case with the establishment of any entity, the name assigned to the HUF shouldn’t be in contravention with any of the specified laws. However, there is no requirement for obtaining name approval.
HUF Deed :
=HUF may be formed with or without a legal deed, though it is always advisable to pursue a business with a written document. With respect to a HUF, a legal deed consists of details of membership of the HUF, the source of funds, and the likes of it. The Deed acts as proof of the existence of the entity that has been formed.
=The document should include a declaration by a family member for the name of the Karta, powers vested with the Karta, and the entitlement of the Karta to hold the transactions on behalf of its members. In addition to it, the document should state the capital that was invested in forming the HUF.
PAN :
Followed by the formation of a deed, the Karta is required to obtain a PAN Card, which is an important document for pursuing financial transactions. The application for PAN must be made in Form 49A, either online through the NSDL website or manual means.
The PAN Card must be used by the entity for the filing of income tax returns and claiming applicable deductions. The application for PAN and income-tax return should consist of the signature of the Karta.
Separate Bank Account: As implicit as it might sound, a HUF must function with a bank account, wherein the funds of the entity can be maintained. Maintenance of such bank account is strictly for business purposes, and shouldn’t include the savings of any member.
4. Disadvantages of Forming an HUF
4.1 Joint family system losing relevance: HUF was recognised as a separate taxable entity by the income tax department. However, in today’s times, where nuclear families are the norm, HUF is losing relevance. Several cases have come to fore where couples or families are fighting it out on common household expenses, forget to pool in of assets. Divorce rates are rising and therefore, HUF as a tax vehicle is losing importance.
4.2 HUF continues to be assessed as such till partition : Once a HUF is formed, you must continue to file its tax returns, unless a partition takes place. Any claim for partition is made to the assessing officer. The assessing officer, on receiving such a claim, must make an enquiry after giving due notice to the members. Income from the property which was partitioned is taxed as individual income of the member. If the member forms another HUF with his wife and children, the income of the property which was transferred from the original HUF is taxed in the hands of new HUF.
4.3 Equal rights of members: The greatest disadvantage of opening a HUF is that its members have equal rights on the property. The common property cannot be sold without the concurrence of all the members. Any additions to the family, by way of birth or marriage, become a member of the HUF and get equal rights. A HUF can get too large to manage. 4.4 Partition: Perhaps the worst nightmare of opening a HUF is closing it down. The only way a HUF can be dissolved is by a partition. All members have to agree to dissolve the HUF. Under a partition, assets are distributed to members which can lead to a lot of disputes and can be a lot of legal hassle.
5 Documents required for opening HUF Bank account
5.1HUF will have a unique PAN card; this PAN card along with the PAN of Karta should be produced.
5.2A declaration form will be provided where every member has to make a signature stating the name of Karta and declare.
5.3 They are the only members of HUF.
5.4 Karta to have sole authority over HUF account.
5.5 Every transaction on behalf of HUF account, made by each member of the family is governed by Karta.
5.6 Residential proof of Karta.
5.6 Identification proof of Karta.
5.8Apart from the points mentioned above there can be other documents or conditions depending on the bank where HUF account is opened.
Regards
Team Ca Sunil Sakral
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