Reduce your tax and multiply benefits with the smart planning

hitesh , Last updated: 01 June 2011
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Reduce your tax and multiply benefits with the smart planning tool called HINDU UNDIVIDED FAMILY (HUF)

This is my first article at CA club of India; I hope it will be informative to the students.

Concept No.1

Creation of HUF in 3 steps

1. Form Corps

Use capital assets to establish the corps of the HUF.
These assets can be ancestral property, assets gifted by relatives and friends, or received by the HUF through will.
Pls. note if you give personal asset to the HUF, the income will be clubbed with your own.
The best way is for the HUF to receive asset as a part of Will.

2. Make a Deed

Now you need to prepare a deed on stamp paper declaring the formation of HUF.
It should have all the details including name of the Karta, co-parceners, address and sources of the funds in the corpus.
Once the declaration deed is made, the Karta should apply for PAN for the HUF.

3. Open a bank account.

The huf is now functional. The Karta will have to invest in tax saving instruments and file tax returns on the behalf of HUF.

Concept No.2

Who can form HUF

Husband and wife can form a huf, but wife can only be a member not a co-parcener.

Now what is difference between member and coparcener?

In case of partition of HUF, only a co-parcener can demand it not a member. So, except this member has equal rights in HUF.

Concept No.3

HUF with money received as a gift from relatives.

As discussed earlier, HUF can be formed with money received as a gift from relatives, but there’s again a tax implication here.
There is no tax on gifts received by an individual from specified blood relatives, the HUF does not enjoy this exemption.
Because the HUF is not individual so it has no relatives. So, any money it gets is treated as a gift from stranger and if value of gift exceeds (cash in kind) it will be deemed income of the HUF and tax accordingly.

Concept No.4

How to transfer asset to HUF?

As discussed earlier, if a person transfer his asset to HUF than it will lead to clubbing provision so,

1.”A person can give property and other asset to his son’s HUF but it should clearly specify that the asset is for setting up the HUF.

2. One can also start the HUF with the funds received on the dissolution (or full partition) of larger HUF.

Concept No. 5

Joining the HUF

There is no need to fill an application form or KYC documents for joining an HUF.
All lineal descendants of the Karta, their spouses and children automatically become member of his family.
Wives join the HUF as members while Children join on birth as co-parceners.
Earlier daughter ceased to be a member of HUF after her marriage but, Hindu Succession Act was amended in 2005 to give equal rights to daughter even after they were married.
Now women are benefited because they have equal rights in two HUFs – their father’s as a coparcener and their husband’s as a member.
In case, a Karta doesn’t have male heirs, the HUF property will be partitioned among his daughters because as per Hindu law, female can not start HUF their own.

Concept No. 6

Systems governing HUF

1. Mithkshara system:

This system is followed in most part of the country except Kerala (because it does not have HUF system at all).
It stipulates that the Property belongs to the HUF, not to an individual.
It can, therefore, be portioned even during the life time of the karta

2. Dayabhaga System:

This is followed in west Bengal and Assam.
Under this the father is the sole owner of the property.
No other member can enforce the partition of the HUF as long as he lives (Father).

I will write up my next article and it will also on the HUF but at very advance level but before it I am waiting for your kind response.

Warm regards,

Hitesh H Nandawani

hhnandawani@gmail.com