How to create huf and what are the benefits of huf?

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suchinder (Querist)
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23 March 2013 Sir,
How to make a huf, what are the legal formalities to be done for creating huf.
And I would also like to ask what are the Benefit of creating huf from the point of veiw of income tax and how can we save tax by creating huf.

PALASH

PALASH (Expert)
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23 March 2013 Legal Requirements for Formation of
A Hindu Undivided Family.

1) CAPITAL & MEMBERS : –

For A HUF to be created , major requirements are 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.

2) SELECT A NAME :- –

A 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 A HUF should be embodied in a deed which provides that a proper legal deed or agreements are 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. 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.

FOLLOWING POINTS ARE EXTREMELY IMPORTANT :-

1) Karta – 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 a HUF. Any other male member of the family can be the Karta with the consent of the other members of the family.
2) The HUF continues to exist in the hands of the female members after the death of the male member.
3) Adopted child can become the member but he cannot become the coparcener.
4) 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.
5) A widow cannot be the Karta of the HUF as she is not the coparcener.

Key points in creation of HUF and format of deed for creation of HUF :
• Under the Income Tax Act, an HUF is a separate entity for the purpose of income tax return.
• The same tax slabs are applicable to HUF as to individual assessee.
• You can not transfer your own assets/money into HUF.
• If you have ancestral property and earning some income from this property, then it is better to transfer this asset to HUF and save tax up to exemption limit applicable to individual.
• You can transfer the money received on sale of ancestral property /assets into your HUF.
• The income from property of HUF can be further invested in instruments such as shares, mutual funds, etc. and will be assessed under HUF.
• Existence of property or multiple members is not a pre-requisite to create HUF. A family which does not own any property may still have the character of Hindu joint family. This jointness is understood in terms of faith and food. This is because as a Hindu is born as a member of the joint family.
• Any gifts received by the members of HUF (birthday, marriage, etc.) can be treated as assets of HUF.

Thanking you,
PALASH RAKSHIT.