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HUF - Know All About HUF / Tax Benefits / Points to Know Before Creating HUF or Transferring Property In HUF



Introduction


Under Hindu Law, a HUF is a family which consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. An HUF cannot be created under a contract, it is created automatically in a Hindu Family. Jain and Sikh families even though are not governed by the Hindu Law, they are treated as HUF under the Act.


Some Important Aspects of HUF:

  • HUF cannot be formed by a single member and it requires at least two members.

  • One of the Member of the HUF has to be appointed as the Karta of the HUF (mean head of family) . Male or Female anyone can be the Karta of family.

  • An HUF need not consist of multiple male members; it can be formed with just one male member, such as a father and his unmarried daughters.

  • Members of the HUF are called “Co-Parceners”

  • No substantial decision related to purchase or disposal of assets belonging to HUF can be taken unless agreed in majority by all the members of the co-parceners.

The Process to Create a HUF:


  • Draft an HUF Deed: The HUF deed includes the name of all the co-parceners / members of the HUF and also names the Karta of the HUF Business. Deed needs to be created on Stamp Papers

  • Obtain PAN No: Apply for the HUF PAN Card by filling out Form 49A.

  • Open HUF Bank Account: HUF has to open a separate bank account for all its transactions. This will be dedicated bank account of HUF


Partition of HUF:


Partition means a division of property. Where the property can admit a physical division, each member's share is determined by making a physical division of the property. On the other hand, where the property is not capable of physical division, partition shall mean such division as the property may admit.


Though partition can be claimed only by coparceners, the following persons are also entitled to their share in the property:

(a) A son in the womb of mother at the time of partition;

(b) Mother (gets equal share if there is partition between sons after the death of father); and


Taxation of HUF


  1. Tax Benefit: HUF is generally viewed as a tax benefit option as it provides the option of creating one more entity separate from the family members where various benefits can be obtained:

  2. Additional Slab of Income with no taxation up to Rs 5 Lakh or Rs 7 Lakh as the cay may be of opting new tax regime or old tax regime. Else can get benefit of slab of income with no tax upto Rs 2.5 Lakhs and than incremental tax as per Slabs of Income . To know slabs of income read here

  3. Additional Deductions under Chapter VIA like HUF can contribute for its members for investment, insurance, etc. and claim additional deductions u/s 80C (Rs 1.5 Lakh) , u/s 80D (Rs. 50,000) , u/s 80DD (Expenditure for differently abled) , u/s 80TTA (Rs 10,000).

  4. Further HUF is allowed to claim benefit of Presumtive Taxation u/s 44AD . To Know about Section 44AD read here.

  5. Can claim all benefits u/s 54 or u/s 54F relating deduction from Capital Gain. To know about Capital Gain Exemption from Sale of House read here.

  6. Any transfer of money from HUF to member is exempt u/s 10(2).

Key Aspects in Calculating HUF Income


In order to compute the income of an HUF, one has to first ascertain its income under the different heads of income (ignoring incomes exempted under sections 10 to 13A of the Act). The following points should be keep in mind while computing income:

  • If funds of an HUF are invested in a company or a firm, fees or remuneration received by the member as a director or a partner in the company or firm may be treated as income of the family (if fees or remuneration is earned essentially as a result of investment of funds).

  • However, if fees or remuneration is earned for services rendered by the member in his personal capacity, it will be treated as the personal income of the member.

  • If any remuneration is paid by the HUF to the karta or any other member for services rendered by him, remuneration is deductible from income of HUF if such payment is genuine and not excessive and paid under a valid and bona fide agreement.

The following incomes are not taxed as income of HUF:-

  • If a member has converted or transferred without adequate consideration his self-acquired property into join family property, income from such property is not taxable in hands of the family.

  • Income of impartible estate (though it belongs to family) is taxable in the hands of holder of estate and not in hands of HUF.

  • Personal income of the members cannot be treated as income of HUF.

  • "Stridhan" is absolute property of a woman, hence income arising therefrom is not taxable as income of HUF.

  • Income from individual property of daughter is not taxable in hands of HUF even if such property is vested into HUF by daughter.

What You Should Know befor Creating HUF


HUF is normally seen as tax saving tool. But it has to carefully understood with long-term implications. Income generate by HUF or properties transferred in the HUF by any members / co-parceners cannot be withdrew back without approval of all the members of the HUF. Thus, it become very vital points in case of family partitions in future and mostly leads to disputes. Further, any personal property/ income accumulated or taken in the HUF name remains HUF assets and thus belongs to all members of HUF which again at individual level can be loss to member of HUF in case of future partitions.


Further any birth in the family creates the automatic rights in the HUF and thus sharing cannot be restricted via any agreement. Many HUF has and is going through legal battles in our country and thus needs to be carefully planned.


 

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