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Definition
HUF is not defined under income tax act but it is same as defined in Hindu law. As the name suggest, this is for Hindu families only, however buddhist, jain, sikh are counted as hindu only for the purpose of formation of HUF.
It consists of all persons lineally descended from a common ancestor (i.e. Wife, children and children?s spouse if living together).
The head of the family (i.e., father/any elected person in case of death of father) is called karta which operates the business of the HUF.
Father, sons and daughters are the coparceners of HUF and have a right to demand partition.
Since Wife is not a coparcener of HUF and cannot demand partition, but wife is the member of HUF.
However married female continues to have the coparcenary interest in her father?s property.
HUF usually has assets which come from gift, a w
ill, or ancestral property, or property acquired from the sale of joint family property or property contributed to the common pool by members of HUF.
Hindu Undivided Family ('HUF') is treated as a ?person? under section 2(31) of the Income-tax Act, 1961. That implies that it is a separate entity in the eyes of law. Separate Income Tax Return has to be filed for HUF also.
Formation
HUF does not arise from contract, but it is a creation of Law. After marriage as soon as a child is Born, HUF comes into existence.
The HUF Deed is a written formal document on a Stamp Paper stating the names of the Karta and the Co-parceners (Members) of the HUF. The eldest male member of the HUF becomes the Karta of the HUF.
In the HUF Deed, A declaration is also provided by each member of the family where they declare the name of Karta and also state that -
Karta has the authority of the accounts vested in his hand
That the members are the only members of the HUF
The Karta holds the right to govern all the transactions of the HUF accounts on behalf of the members.
Then, PAN application form duly filled in and signed by the karta is submitted.
Copy of documents like proof of identity, address and date of birth in respect of all individual and karta of HUF.
Tax benefits
HUF has its own PAN card, therefore you can file separate income tax return other than individual account and split your family income.
HUF is entitled to open saving accounts same as individual saving accounts.
Deductions and exemptions can be claimed under the income tax act as it is taxed separately.
HUF can take an insurance policy on the life of its members.
HUF is taxed at same individual rates.
Investments can be made from HUF income, any returns earned or received from these investments are taxable in the hands of HUF.
Salaries paid to HUF member for contribution in functioning can be claimed as expense.
Capital gains is not attracted in case of asset distribution on partition.
No clubbing of income u/s 64.
No tax liability on gift.
Can Transfer individual property to family.
Members of HUF can get loans from HUF.
Disadvantages
Dissolution:
Perhaps the most terrifying aspect about starting a HUF is shutting it down. A partition is the sole way to dissolve a HUF.
To disband the HUF, all members must agree. Assets are dispersed to members under a division, which can result in a lot of disagreements and legal headache.
Assessment till partition
Unless a partition occurs, you must continue to file the HUF's tax returns after it is constituted. Any partition claim must be filed to the assessment officer.
When the assessing officer receives such a claim, he or she must conduct an investigation after notifying the members. The revenue from the partitioned property is taxed as the member's individual income.
The revenue from the property transferred from the original HUF is taxed in the hands of the new HUF if the member creates another HUF with his wife and children.
Equal rights
The greatest disadvantage of opening a HUF is that its members have equal rights on the property. The common property cannot be sold without the concurrence of all the members.
Any additions to the family, by way of birth or marriage, become a member of the HUF and get equal rights. A HUF can get too large to manage.
Documentation for registration
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Got a question?
We've got answers.
Are there any minimum number of coparceners required for an entity to be taxed as HUF?
A HUF can be formed with just two members one of whom is a coparcener. But for an entity to be taxed as a HUF, it should have at least two coparceners. For instance, if HUF consists of only the husband and wife, then there is only one coparcener. So it will not be taxed in the hands of HUF except in the case where the funds are received on the partition of larger HUF. It will be taxed in the hands of a sole coparcener.
Can the members of the HUF and the HUF separately claim deduction under Section 80C?
Should a HUF always be a resident of India?
Upon the demise of the Karta, who takes over the title 'Karta'?
Who is the Karta of an HUF?