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HUF Formation

What is HUF?

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HUF Formation Starting At ₹ 2499/- (Onwards) + GST HUF stands for Hindu Undivided family and it is governed under Hindu law board. It could be formed by a married couple or by members of a joint family. HUF could be formed by two members, at least one of which should be a male member of the family. Senior most male member of the family would become ‘Karta’. Although it is governed by the Hindu law board, it can be formed by Jains, Sikhs and Buddhists as well.
The Income Tax Act recognizes the HUF as an independent assessable or taxable entity. Hence, HUFs enjoy all deductions and exemptions under the IT Act independent of the income and tax liabilities of its members. A separate Income Tax Return is filed under Income Tax Act. This helps to separate tax obligations of an individual from that of his family. Tax slabs of HUF are same as that of an individual.

Members of HUF

An HUF consists of: Karta: Karta is generally the father of the family or the senior most person of the family who has the right to do all the things for the family and take 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. All the coparceners have equal right in the HUF.

Supreme Court has clarified two points in respect to rights of Daughters in HUF:

In its objects have promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object;

Intend to apply its profits, if any, or other income in promoting its objects; and

Intend to prohibit the payment of any dividend to its members,

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.

How to create HUF?

HUF has to be created keeping in mind the legal and financial requirements.

  • Capital and Asset Infusion– HUF corpus can be created by-
    • Money received as gifts from relatives,
    • Assets received under a will or inheritance,
    • Partition of a larger Hindu Undivided Family or Reunion of separated co-parceners
    • Bringing together property of two or more persons.
  • Legal requirement – A HUF is created through executing a deed. It can then apply to get a PAN for the HUF and open a bank A/c in the name of 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.

Documents Required

  • PAN Card of all members
  • ID Proof (Driving License/Passport/Voter ID) of all members
  • Electricity Bill or any other utility bill for the address proof of HUF
  • Details of property and assets

Process of Forming a HUF

Formation of HUF can be done in 3 steps which have been summarized below:

  • Step 1: Preparation of Deed: It is a formal document with Stamp paper of respective stamp of considerable value as per the state of registration. Deed shall state the names of the Karta and the Co-parceners (Members) of the HUF along with a declaration filed by all the members and co parceners.
  • Step 2: Apply for PAN Card: On registration of Deed, a HUF can apply for PAN of its own. Once the PAN Card has been allotted, the HUF can claim benefit of income tax slab rates and deductions and exemptions which are available to an Individual.
  • Step 3: Open bank account: With the help of above documents a HUF can open a Bank Account through which it will make all the transaction. A HUF Account can be opened in any bank account. The UF would also be required to have a Rubber Stamp of the HUF and all documents pertaining of the HUF should be properly stamped.

What other Registrations can be taken for an HUF?

Although HUF doesn’t require any specific registrations to operate a business, it is advised to obtain the following registrations to make the business function smoothly.

  • Registering under MSME Act (Udyam) An HUF can get registered under the MSME Act by applying for Udyam Registration number. Udyam registration provides various benefits which are provided by Government authorities for promoting specific industries.
  • GST Registration GST Registration is required if annual turnover is more than Rs. 20/40 lakhs. Also, if the HUF is doing online business then it is required to get a GST number

Benefits of registering a HUF:

The major benefit in opening a HUF is that it can provide you with additional tax benefits that may help reduce your tax burden. Some of the benefits available have been summarized below:

  • Income tax benefits An HUF is a separate entity from a legal point of view and the HUF has its separate PAN card. An HUF can run its own business to generate income. It can also invest in shares and Mutual Funds. And being a separate entity, the HUF enjoys a basic tax exemption of Rs 2.5 lakh. So, imagine that you create an HUF consisting of you, your spouse and two children. In addition to income tax benefits you enjoy individually, you can also avail of an additional basic income tax exemption of Rs 2.5 lakh each year.
  • Owning a house nder current income tax laws, if you own more than one self-occupied property, only one of them can be claimed as a self-occupied property. The rest are ‘deemed to be let out’ and you have to pay tax on notional rent. However, an HUF can own a residential house without having to pay tax. In addition, it can also avail of a Home Loan to purchase a residential property and get tax benefits up to Rs 1.5 lakh under Section 80C of the Income Tax Act for loan repayment and up to Rs 2 lakh for interest thereon.
  • Life Insurance Provisions of the Income Tax Act allow individuals to claim tax benefits on certain payments they make during a year. Similar benefits are applicable for an HUF. For example, an HUF can pay Life Insurance premium for individual members, and claim tax benefits under Section 80C. The maximum amount that can be claimed as a deduction under this section is Rs 1.5 lakh
  • Investments An HUF is allowed to make investments in tax-saving Fixed Deposits and Equity Linked Savings Scheme (ELSS) to earn tax benefits of up to Rs 1.5 lakh under Section 80C. And while an HUF cannot open a Public Provident Fund (PPF) in its name, it can claim tax deductions for the amount deposited by the HUF in respective PPF accounts of its members.

Characteristics of Section 8 Company

  • Object in the Memorandum of Section 8 Company can only have objects such as, promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment etc.
  • Can be incorporated as a limited Company either a Private Limited Company or a Public Limited Company without addition of word"Limited", or as the case may be, the words "Private Limited".
  • The name of a Section 8 Company must end with the words like Foundation, forum, association, federation, chambers, council, electoral trust. Etc.
  • Minimum of 2 Director and 2 members in case of Private Limited and a Minimum of 3 Directors and 7 members in case incorporated as Public Limited Company.
  • No Minimum or Maximum requirement of Capital for Sec 8 Company.
  • During the Incorporation, on complete documents submission, Ministry will first issue License under Section 8 (1) of The Companies Act, 2013 in the form of INC 16, thereafter other documents such as COI, PAN, TAN etc. are issued.
  • After the Incorporation, Section 8 Company can take Taxation benefits provided under Income Tax Act, 1962 by getting registration under Section 12AA and 80G.
  • Any profit or income made by the company can be only applied towards promoting the objectives of the company and cannot be distributed as dividends to its members.

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