In our previous article, we focussed on how a HUF can be used to save taxes legally and we have received a tremendous response for the same from our readers who have also requested for an article on How to create HUF & HUF Deed.
- Recommended Read: How to save taxes legally by forming HUF
Creation of HUF
HUF stands for Hindu Undivided Family wherein the Income that is being earned belongs to the whole family and not to any specific individual. As the Income is being generated in the hands of the whole family, this income cannot be taxed in the hands of the family but is taxed in the hands of the HUF. And, therefore HUF is considered as a separate entity for the purpose of Income Tax Act and the HUF has a separate PAN Card and a separate income tax return is filed for the same.
A HUF automatically comes into existence when a person gets married and starts his family. It is not necessary that this new family should also have kids. The day when bride and groom get married, they have formed a HUF.
Although a HUF is automatically formed at the time of marriage, it is always advisable to have a written agreement as the Banks and Income Tax Dept ask for the HUF Deed. It is not necessary that HUF is created on the day of marriage itself and can be created at any point of time in future.
Creating a HUF is not a difficult task and the steps involved in creating a HUF are explained below.
How to create HUF
To create a HUF, 3 things are required i.e.
Step 1: Create HUF Deed
Step 2: Apply for HUF PAN Card
Step 3: Open Bank Account of HUF
These 3 steps have been explained below in details
The 1st Step in creating a HUF is to create the HUF Deed. 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.
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.
The names of the members of the HUF and the name of the HUF are also required to be stated in the HUF Deed at the time of creation of HUF. The name of the HUF is usually the name of the Karta followed by the word HUF. For eg: If the Karta of the HUF is Suresh Kumar, the name of his HUF would be Suresh Kumar HUF.
It also states the capital with which the HUF has been initiated. There are various sources through which Capital can be introduced in the HUF.
- Recommended Read: How to create Capital in HUF
Format of a HUF Deed are given in this link. Most notary public agents have such formats and help in creating of HUF at a nominal fee. The fees charged by notary public agents for creating a HUF Deed Format are a few hundred only.
Creating a HUF Deed is not mandatory and PAN Card and Bank Account can be opened without HUF as well but it’s always better to have a written document in place.
As a HUF is treated as a separate entity different from its members, a HUF is required to apply for a separate PAN Card. An application for HUF PAN Card is required to be made in Form 49A which can be furnished online as well as manually. HUF PAN Card Application can be made online through this link: https://tin.tin.nsdl.com/pan/form49A.html
Once the PAN Card has been allotted, the HUF would be required to file separate Income Tax Returns and can therefore claim benefit of income tax slab rates and also claim most of the income tax deductions which are available to an Individual. The application for PAN Card and the Income Tax Return would be signed by the Karta.
A HUF is also required to open a Bank Account in which it will receive all payments. A HUF Account can be opened in any bank account.
At the time of opening of HUF Bank Account for creation of HUF, the HUF would also be required to have a Rubber Stamp of the HUF and all documents pertaining of the HUF should be properly stamped. This rubber stamp should be rectangular as Round Stamps are now not accepted (RBI Circular)
Once all the above 3 steps are completed i.e. the HUF Deed has been created, PAN Card has been allotted and the Bank Account has opened, the HUF is now a separate legal entity and can start receiving payments and the amounts received in the name of the HUF will not be taxed in the hands of the individual members of the HUF.
Members of HUF
As HUF stands for Hindu Undivided Family, individuals belonging to other religions are not allowed to form HUF’s except Jain and Sikh who can create HUF even though they are not governed by the Hindu Law.
An HUF consists of
Karta: Karta is generally the father of the family who has the right to do all the things for the family and takes all the decisions on the behalf of the family.
Co-Parceners: Coparcener is the person who has the right to demand the share of the property of family if he/she wants to part away with the family with his/her share.
Not all members of the HUF are its coparceners. The co-parcenery extends to four degrees down the family hierarchy in the following manner:
- 1st degree: Holder of ancestral property for the first time.
- 2nd degree: Sons and daughters
- 3rd degree: Grandsons.
- 4th degree: Great grandsons.