HUF – All You Need To Know

What is HUF

HUF means Hindi Undivided Family, which is governed under the Hindu Law Board. It includes Sikh, Jain, or Buddhist families also. A HUF consists of all persons lineally descended from a common ancestor, Karta, and also the wives and daughters of the male descendants.

The eldest person of the family is known as “Karta,” who manages all day-to-day affairs of the HUF, and other family members are known as “Coparceners.” Coparceners (both son and daughters) are entitled to get his/her own share of the HUF property. 

How is HUF Formed

HUF is formed only by the family having a child. Any three members of the family, i.e., a married couple or the members of the joint family, can form HUF. However, one of them must be a male member, i.e., Karta. Any male member of the family can play the role of Karta and shall be responsible for decision-making. 

Therefore, it is automatically created and consists of a common ancestor and all of his descendants. Once the HUF is formed, it must be legally registered in its name through a legal deed. 

Further, the death of the Karta doesn’t affect the continuity of HUF. It can continue to HUF functions with the existing HUF members. 

Prerequisites to form HUF

The formation of HUF requires:

Family members: The primary requirement of creating a HUF is the “Family members.” The members of the HUF include Karta and co-parceners. 

Execution of HUF deed: HUF deed is a written formal document on a stamp paper contains the following details: 

• The names of Karta and Co-parceners (Members) of the HUF.
• Capital contribution by each member 
• Declaration by each member stating that
• Karta has the sole authority over HUF accounts
• They are the only members of HUF
• Karta is governed for every transaction on behalf of HUF 

Obtaining PAN in the name of HUF: An HUF enjoys a separate entity from its members; therefore, it requires a separate PAN Card. HUF is required to file an application in Form 49A to apply for a HUF PAN card. 

Opening a bank account in the name of HUF: After obtaining PAN, it requires to open a separate bank account to receive incomes and make the payments. 

Now, HUF can start receiving or making payments in the name of HUF, and all such transactions will not be taxed in the hands of individual members of HUF. 

Documents Needed for HUF

• PAN card of the Karta and HUF
• Copy of residential proof of Karta, i.e., electricity bill, water bill, etc. 
• Copy of identity proof of Karta, i.e., driving license, voter Id, passport, etc. 

How to apply for HUF PAN Card

A HUF can apply for a PAN card online or offline. Here are the simple steps to apply for a HUF PAN card:

Step 1: Visit the NSDL website https://www.onlineservices.nsdl.com/paam/endUserRegisterContact.html

Step 2: Select application type as “New PAN – Indian citizen (Form 49A) and category as “Hindu Undivided Family.”

Step 3: Fill the required details such as the name of HUF, date of incorporation, and contact details. Click on submit, and it will open a new page containing “PAN application Form.”

Step 4: Enter all the details related to the HUF and attach the necessary documents. Now, submit the application along with the application fee. You will receive an acknowledgment number for future reference. 

How is HUF treated in tax?

HUF income is taxed separately from its members. They have their own PAN and file independent returns than of its members. 

Basic slab rate:

The slab rates applicable to an individual (exemption limit of Rs. 2.5 lakh) are applicable to HUF for computing the tax liability. 

Alternative minimum tax (AMT):If the tax payable by HUF is less than 18.5 percent of the adjusted total income (including surcharge and cess), then an HUF is liable to pay AMT.

Tax saving options for HUF

Here are the ways which we can help the HUF to save tax:

• HUF can avail various deductions under chapter VI of the Income-tax Act, such as 80C, 80D, 80G, etc. E.g., you can invest the HUF income in life insurance policies, PPF accounts, ELSS in the name of Karta, co-parceners, or members of the HUF and claim income tax deductions under Section 80C.
• HUF also enjoys exemptions benefits of capital gains under sections 54, 54D, 54EC, 54G, 54D, and 54F.
•  No capital gains arises in the hands of HUF on the distribution of assets on the HUF partition. 
• HUF can pay remuneration to its members, and such salary expense is allowed to be deducted from the HUF income.

Can we take any income in HUF?

The HUF members can take remuneration and salary from the HUF on fulfilling the specified conditions. However, such remuneration shall be taxable in the hands of the HUF members.

• Remuneration must be paid under a bona fide and valid agreement 
• It should be reasonable and not excessive 
• It should be for rendering services in the family business 

Is it beneficial to form HUF?

Forming an undivided Hindu family provides various benefits to HUF and its members. It includes:

• A HUF can optimize its tax liabilities by getting the benefit of slab rates and claiming various investment &deductions. 
• HUF families can apply for the two separate PAN cards, i.e., HUF PAN Card and personal PAN card. It helps to do tax planning and file ITR separately. 
• As soon as the HUF is created, all the members get equal rights in HUF property. 
• HUF is recognized all over India except Kerala. 
• Members of the HUF can easily avail the loans.