Are you wondering whether you should create a HUF or not? Members of a HUF get several perks including tax benefits. However, it has some disadvantages too. This guide can help you understand the concept of HUF in a simple and detailed manner with pros and cons so that you can judge if forming a HUF is a good choice or not for you.
The members of a Hindu family can come together and form a Hindu Undivided family. It forms automatically in a Hindu family without the requirement of a contract. One single person alone cannot form an HUF. Brahmo Samajist, Arya Samajist, Virashaiva, Lingayat, Prarthna Samajist, Jains, Sikhs, and Buddhist families can also form an HUF even though the Hindu Law does not govern them. It consists of a common ancestor and every one of his lineal male children together with their spouses and daughters. Daughters are considered a member of their father’s HUF until they get married. The HUF files return independently and is separate from its members. The assets of HUF are the ones which come as a gift, a will, an ancestral property, property acquired from the sale of joint family property or property contributed to the common pool by members of HUF.
All the members in a family are considered members of an HUF, wherein the male members are referred to as coparceners and the female members are referred to as members. The senior most male member in the family is normally referred to as Karta, who manages the affairs of the family.
The Karta of the family generally manages the family property, which is regarded as the joint property of all the coparceners. The coparceners can demand the partition of an HUF by way of distribution of HUF property among the coparceners. This partition cannot be demanded by the members of HUF, and they would be entitled to receive maintenance from the HUF.
An HUF is formed by a family. It is automatically formed when a person gets married and starts a family. After the HUF is formed it must be registered in its name. Below mentioned are the few important things required to form an HUF.
Other than the HUF Deed, PAN Card and bank account in the name of HUF below paperwork is required to be kept by an HUF.
All the documents collected for opening an individual’s Demat and trading account are collected from the Karta. The following documents are required:
HUF files tax returns independently and is separate from its members. After ascertaining its total income under the different heads of income (without giving effect to the provisions of section 10A, 10B and 10BA or Chapter VIA), if the income exceeds the exemption limit, the HUF has to file a return of income.
The taxpayers are not required to attach any document (like proof of investment, TDS certificates, etc.) along with the return of income as ITR forms are attachment less forms. However, in case of assessment or inquiry conducted by the tax department, the taxpayer should retain and produce these documents before the tax authorities.
However under section 10(23C)(v), 10(23C)(vi), 10(23C)(vi)(a), 10A, 10AA, 12A(1)(b), 44AB, 44DA, 50B, 80-IA, 80-IB, 80-IC, 80-ID, 80JJAA, 80LA, 92E, 115JB or 115VW, the taxpayer who is required to furnish a report of audit shall furnish it electronically on or before the date of filing the return of income.
[Read: ITRs to be filed by HUF]
The income which is earned by using HUF funds or property only is taxable as HUF income. Income that arises on the investment of HUF funds (e.g. interest earned on loans given by a HUF) or on the utilisation of HUF assets (e.g. rent earned from let out HUF property) would be regarded as HUF income.
When the HUF contributes funds to the capital of a partnership firm, the profit and interest received from that firm by a partner who represents the HUF is considered as HUF income. This is because the income in this case has been raised by investment of the HUF’s funds.
There are a number of advantages of forming an HUF:
Not everything is rosy about HUF, there are some disadvantages as well:
Yes, a woman can become HUF Karta. The Delhi High Court ruled in favour of a female being the Karta of an HUF. However, the same has not been implemented in the Income Tax Act.
Yes. In Kerala, HUF is not recognised. It was abolished by The Joint Family System (Abolition) Act, 1975, by the Kerala State Legislature.
There should be minimum 2 coparceners in a family for that entity to be taxed as an HUF.
Yes. As on 9th September 2005, the Indian Succession Act has been amended by few states like Maharashtra, and Tamil Nadu wherein the daughters are to be regarded as coparceners who were unmarried as on the date of the amendment. However, this right is not given to women in most parts of the country.
No, the daughter will not be able to claim a share in her father’s property as both must be alive on the date of the amendment.
Basically, there aren’t many complicated formalities required for an HUF. It is automatically formed, is simple and if its benefits are utilised smartly, it can help one save taxes to a great extent.