An assessee is always concerned about the tax structure in relation to any form
of business organization be it a sole proprietorship, company or a firm. In this
regard HUFs are also a form of business organization through which an assessee
can save taxes. Creating HUF is the best way to save taxes by an assessee.
Forming an HUF does not involve huge legal or procedural formalities to be
followed.
HUFs – Hindu Undivided
Families are the form of organizations has separate legal entity for the purpose
of tax assessment. The HUFs have been defined under the Hindu law as a family,
which consists of male lineally
descended from a common ancestor and included
their wives and unmarried daughters. The relation of HUFs arises from the status
not from legal contracts. Creating HUFs are the best possible way for an
assessee to save taxes.
Schools of law under
HUF – Two schools of law are there in order to create a HUF:
a) Dayabhaga
– It is prevalent in West Bengal and Assam. As per this school of
law, the son acquires the right in the family property only after the death of
his father.
b)
Mitaakshara – It is prevalent in rest of
India under which, the son acquires the right in the family property right from
his birth.
Steps involved in creation of HUFs –
1) Capital and
members – For an HUF to be created the major requirements is the
capital and persons. Capital can be in the form of ancestral property, assets
gifted by relatives and friends, or received by the HUF through a will. The
minimum no. of members required is two who can be a husband and wife. Both the
spouse can create a family and constitute a HUF. They don’t have to wait till
they have a baby to constitute their HUF.
2) Select a
suitable name – The HUF to be created should have proper name.
Select a proper name for the HUF and the name should not violate the laws or
have any negative impact. The members can choose a suitable name before starting
a HUF business form.
3) Form a
Deed – Formation of HUF should be embodied in a deed which
provides that a proper legal deed or agreement is required before creating a
HUF. The agreement/ deed should have all the details, including the name of
Karta, co-parceners, address and source of funds in the corpus. Deed will
facilitate that the business or the formation of HUF is valid and true.
4) Apply for
PAN – Application for PAN (Permanent Account Number) is also an
important step to be undertaken while forming a HUF. After executing the deed,
the Karta is required to obtain a permanent account number PAN for the HUF.
Obtaining PAN is a mandatory requirement as all financial transactions shall
carry PAN.
5) Open a Bank
Account – After PAN has been allotted, the Karta is required to
open a Bank a/c in the name of the HUF. It is also advisable to get some
stationery printed for official communication. The HUF is now ready to function.
The Karta will have to invest in tax saving instruments and file tax returns on
behalf of the HUF. Only the money related to the business of HUF shall be
invested in such Bank accounts.
Formation of HUF is no more a cumbersome process
for any individual. Forming HUF can help you save taxes to an extent.
Points to be noted:
- Karta – A Karta is the person who manages the affairs of the family. It is not necessarily required that the senior most member should be the Karta of an HUF. Any other male member of the family can be the Karta with the consent of the other members of the family.
- Coparceners – The person who acquires by birth the interest in the family property. The coparcener enjoys the right to enforce partition.
- The HUF continues to exist in the hands of the female members after the death of the male member.
- Adopted child can become the member but he cannot become the coparcener.
- The daughter after her marriage ceases to be a member of her father’s HUF. After marriage she becomes the member of her husband’s HUF.
- A widow cannot be the Karta of the HUF as she is not the coparcener.
- HUF is a separate entity for income tax purposes under the provisions of Section 2(31) of the Income Tax Act
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