If you are a Married and your religion is Hindu Including Jain, Sikh and Buddhists then Good News you are eligible to Formation of HUF and get benefit of it. You can get exiting benefits like Tax Savings, additional Income Sources and much more.
So, if you are interested to know How to Form HUF, Advantages and Disadvantages of HUF, Tax Savings then this article is for you.
Table of Contents
What is HUF aka Hindu Undivided Family?
Concept of HUF is based on joint family structure followed by Hindu Communities from generation to generation including Jains, Sikhs and Buddhists Communities also which is similar to Hindu Values. HUF is classified as Legal Entity and all laws are applicable to HUF as a Separate Tax Entity.
Joint Family follows Eldest Male Member of Family as a Head of Family and all Decision is made by such Elder Male Member. So, HUF is also follow same value of Eldest Male Member as a Head.
All Assets of Family will came from Ancestral Property, Gifts or Acquired by Member of Family and Consider as Common pool of Assets of All Member of Family.
HUF’s Karta / Members / Coparceners
Karta of HUF
Head of Family/ Male Eldest Member of Family is Consider as Karta of HUF.
Karta has all Right to act a Authorised Person to act on behalf of HUF and also segregate rights to other Member of HUF.
Members of HUF
All Family Members will be a Member of HUF like Husband, Wife, Children and their Spouses, and their Children. Married Daughters is not considered as a Member of HUF, but she is consider as Coparceners (After 6th September, 2005).
Members other than Coparceners can not claim Partition and don’t claim assets of HUF.
Coparceners of HUF
All Male Members of HUF is Coparceners of HUF and Daughters are also Coparceners of HUF (After Legal Judgement on 6th September, 2005)
Coparceners can claim a Assets at a time of partition of HUF.
So that saying is All Coparceners are Member but All Member May not be a Coparceners.
When and How HUF is Created or Formed?
At a time of Marriage; HUF will automatically created and Husband became a Karta of HUF and wife became a Member of HUF. after birth of Children; Children automatically became a Member of HUF and So on till Partition of HUF by its Member.
But For Legal Consideration Head of Family Need to Execute HUF Deed and modify time to time for update the Information.
Documents Required to Create a HUF
- PAN and Aadhaar and Passport Size Photograph of Elder Male Member of Family.
- Rs. 300/- Stamp Paper for Execution of HUF Deed. (As per Gujarat Gov. Stamp Duty Rules)
All Adult Member of HUF will sign the HUF Deed and Make Before Me Notary from Government Registered Notary Public Services.
If Registered Address is other than Address Other than Aadhaar then Valid Address Proof (Rent Deed, Electricity Bill, Property Tax Receipts Etc.) Also Required.
Legal Requirements Followed after Creating HUF Deed
Apply for PAN Card of HUF.
Open a Saving/Current Account in Bank.
If you want to do Business in name of HUF then Apply for Professional Tax Certificate under Local Laws.
If you want to apply in IPO or Invest in Share Market than Open a Demat Account with SEBI Registered Stock Broker. (you must do because it is generate a additional income source.)
Format of HUF Deed for HUF Creation/Formation
HUF Deed Word File
Benefits to create a HUF
Income Tax Benefits
HUF allotted Separate PAN So, Income of HUF Separately Taxable and Basic Exemption Limit also Applicable to HUF which is Now Rs. 3,00,000/- in New Regime of Income Tax. (2,50,000/- in Old Regime)
If HUF Follows Old Tax Regime than 1,50,000/- Limit of Section 80C as well Mediclaim u/80D as well as other Deduction under Chapter IV-A like a 80G, 80TTA also Available to reduce Taxable Income in hand on HUF.
HUF can also claim Rs. 50,000/- Tax Free Gifts other than individual Capacity under sections 64(2) and 56(2) of Income Tax Act.
Good and Service Tax (GST) Benefits
Since HUF is Separate Legal Entity and Many Family also have Family Run Business as well as Separate Business.
So, HUF get Fresh Exemption Limit of Rs. 10 Lakh/ 20 Lakh/ 40 Lakh is available other than HUF Member’s Separate Business.
For Details check of Eligibility under GST; you can refer Article on GST Registration.
Build Corpus for Family
Ancestral Properties Transfer to Common pool of HUF So, that HUF Can build Corpus for Family and Additional Tax Burden not increased to Members of HUF. and Tax Saving means additional Fund available to HUF.
HUF can even avail a Loan facilities from Banks/NBFCs Etc. So that it will help in develop Family run Business.
Extra Income for Primary Market/IPO Benefits
Since HUF can open a separate Demat account in HUF name so, it can be Apply IPO in Primary Market and earn Capital Gain.
Social Benefits
If Person Adopt a Child then this child is also became a Member of HUF.
Since, All Decision taken by Karta only so, that Decision Making is easy in Joint Family. (* May be not in Some Family 🙂 )
Disclaimer: This is not Legal or Investment Advise. Please Consult with your Tax Consultant / Chartered Accountant.
Disadvantages and Complications of HUF
For Every Benefit of HUF come with a Disadvantages also like a;
Since all Assets of HUF is equal right between Coparceners; Decision Making of Sale/Mortgage or Transfer is Difficult.
Partition are Complex and Tedious because Karta can Distribute assets in any Ratio between Members and this is Dispute Matter in Joint Families at a Time of Partition of HUF.
Many HUF Partition end up in Court Cases which Leads to Separation of Joint Family.
In Era of Nuclear Family and Divorce after Children Birth are hampering Assets of HUF Because Children are also coparcener in HUF.
HUF is Tax Beneficial for Small Income Group only; For Large Income Group this tax part is not beneficial.
Effects of Tax on HUF
Let’s take Example of Person Ramesh; Ramesh is Earning Salary Income Rs. 7,20,000/- Per Year and reside with family. Father of Ramesh Purchased Rented Property from his Retirement Fund and enjoying Rental income till today. Due to Demise of Father; Ramesh get Ancestral Property of Father. This Property earn Rent of 35,000/- Per Month.
Let’s Take two Scenario without HUF and with HUF.
Scenario 1 : Ramesh Transfer this Ancestral Property to own Name.
Total Income of Ramesh = Salary + Rent
Total income = 7,20,000 + 4,20,000
Taxable Income in Hand of Ramesh = (7,20,000 – 50,000 Standard Deduction u/s 16(ia)) + (70% of 4,20,000)
Total Taxable Income of Ramesh = 9,64,000/-
Total Tax on Income of Ramesh as per New Tax Regime = 56,784/-
Scenario 2 : Ramesh Transfer this Ancestral Property to HUF.
Total Income of Ramesh = 7,20,000/- Salary
Total Income of HUF = 4,20,000/- Rent
Taxable Income of Ramesh = 7,20,000 – 50,000 = 6,70,000/-
Tax Payable after Rebate as per New Tax Regime For Ramesh = 0/-
Taxable Income of HUF = 70% of 4,20,000/- = 2,94,000/-
Tax Payable as per New Tax Regime For HUF= 0/-
Total Tax Payable as per New Tax Regime For Ramesh and HUF = 0/-
So, You can see the Tax Saving of 56,784/- by way of HUF.
How to Plan your Income and Finances using HUF
After New Tax Regime Deduction u/s 80C, 80D, 80G Etc. can not be claimed (Since 7,00,000/- is better Limit compare to 5,00,000/-), But For HUF you can opt for Old Regime and Get Deduction Benefits.
Make Separate IPO Application in Name of HUF So, you can generate additional income.
Transfer Ancestral Property to HUF for reduce additional Tax Burden.
50,000/- Cash Gift is exempt for HUF so, use it to build corpus and Make Investments.
Use HUF for Small Family Run Business to reduce GST Burden. (Upto Max 40 Lakh T/O Limit)
Legal Compliances Keep in Mind for HUF
Prepare and Maintain Books of Accounts.
Maintain KYC Compliant Bank Account.
File Income Tax Return of HUF Before 31st July (Non Audit Case)
If HUF is Doing Business then take Professional Tax Registration and Pay annually with Local Body.
Conclusive Summary
So, Above Article explains the concept of Hindu Undivided Family (HUF) and its benefits for married individuals of Hindu, Jain, Sikh, and Buddhist religions. It discusses the formation of HUF, the roles of Karta, members, and coparceners, as well as the legal requirements and documents needed to create an HUF. It also outlines the advantages of forming an HUF, such as tax savings, additional income sources, and building a corpus for the family. It also mentions the disadvantages and complications of HUF, including complex partition processes and potential court cases. It provides examples of tax implications with and without HUF and offers tips on planning income and finances using HUF. Legal compliances for HUF, such as maintaining books of accounts and filing income tax returns, are also highlighted.
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