C. FORMING AN HUF
1. Any Hindu, Sikh, Jain or Buddhist man can form an HUF, provided he is married.
2. In fact, an HUF is automatically constituted when a couple exchanges wedding vows.
3. A husband and wife can form an HUF, but a wife can only be a member, not a co-parcener.
4. Therefore, only the birth of a child will give the unit the status of an HUF for tax purposes.
5. An HUF can also be formed by partition of an existing HUF into multiple units.
6. A suitable name needs to be given to the HUF, taking into consideration the prevalent laws and the business that it intends to undertake, and completing the formalities listed below for the HUF to function as a legal entity:-
(I) Forming a corpus
1. The first step is to form a corpus for the HUF, which can be any capital asset or cash.
2. However, you can’t transfer just any asset to your family ‘hotchpot’, as any personal funds or property given by an individual to the HUF will lead to clubbing provisions under Sec 64(2) of the IT Act.
3. This means that the income from these assets will be treated as that of the individual, thus defeating the very purpose for which the HUF was established.
4. The HUF can be formed with money received as gifts from relatives, but it will be treated as gifts from strangers, as an HUF is not an individual and cannot have relatives.
5. Therefore, if the value of the assets received as gifts in a year exceeds Rs.50,000, it will be deemed as income of the HUF and taxed accordingly.
6. However, it can safely receive gifts and other income without incurring any tax liability because of the basic exemption available to it, including tax-saving investments, under Sec 80C.
7. The best way to avoid the tax tangle is to form the corpus with assets received as part of a will directly by the HUF, and not through transfer from an individual’s assets.
8. One can also start the HUF with funds received on dissolution (or full partition) of a larger HUF, where the Karta divides the larger HUF property between the co-parceners and transfers the fund to their newly-formed smaller HUFs.
9. If the ancestral property is sold, the proceeds received can also be transferred to the HUF.
10. Therefore, an HUF corpus should be formed by:-
o Transferring ancestral property or its sale proceeds
o Assets received by the HUF directly through a will
o Assets gifted by relatives and friends.
(II) Making a deed
1. The second step is to prepare a deed on stamp paper declaring the formation of the HUF.
2. Though it is not mandatory to have a deed for the formation of an HUF, it is advisable to execute one from a legal and taxation perspective.
3. It should have all the details, including the name of karta, co-parceners, address and source of
funds in the corpus, as well as the business of the HUF.
(III) Applying for PAN
1. Once the declaration deed is made, the karta should apply for a Permanent Account Number (PAN) for the HUF.
2. This is mandatory because all financial transactions of the HUF must carry PAN.
(IV) Opening a bank account
1. After you are allotted a PAN, open a bank account in the name of the HUF.
2. It is also advisable to get stationery printed for official communication.
3. The HUF is now functional, and the karta can now invest and file tax returns on behalf of the HUF.
1. Any Hindu, Sikh, Jain or Buddhist man can form an HUF, provided he is married.
2. In fact, an HUF is automatically constituted when a couple exchanges wedding vows.
3. A husband and wife can form an HUF, but a wife can only be a member, not a co-parcener.
4. Therefore, only the birth of a child will give the unit the status of an HUF for tax purposes.
5. An HUF can also be formed by partition of an existing HUF into multiple units.
6. A suitable name needs to be given to the HUF, taking into consideration the prevalent laws and the business that it intends to undertake, and completing the formalities listed below for the HUF to function as a legal entity:-
(I) Forming a corpus
1. The first step is to form a corpus for the HUF, which can be any capital asset or cash.
2. However, you can’t transfer just any asset to your family ‘hotchpot’, as any personal funds or property given by an individual to the HUF will lead to clubbing provisions under Sec 64(2) of the IT Act.
3. This means that the income from these assets will be treated as that of the individual, thus defeating the very purpose for which the HUF was established.
4. The HUF can be formed with money received as gifts from relatives, but it will be treated as gifts from strangers, as an HUF is not an individual and cannot have relatives.
5. Therefore, if the value of the assets received as gifts in a year exceeds Rs.50,000, it will be deemed as income of the HUF and taxed accordingly.
6. However, it can safely receive gifts and other income without incurring any tax liability because of the basic exemption available to it, including tax-saving investments, under Sec 80C.
7. The best way to avoid the tax tangle is to form the corpus with assets received as part of a will directly by the HUF, and not through transfer from an individual’s assets.
8. One can also start the HUF with funds received on dissolution (or full partition) of a larger HUF, where the Karta divides the larger HUF property between the co-parceners and transfers the fund to their newly-formed smaller HUFs.
9. If the ancestral property is sold, the proceeds received can also be transferred to the HUF.
10. Therefore, an HUF corpus should be formed by:-
o Transferring ancestral property or its sale proceeds
o Assets received by the HUF directly through a will
o Assets gifted by relatives and friends.
(II) Making a deed
1. The second step is to prepare a deed on stamp paper declaring the formation of the HUF.
2. Though it is not mandatory to have a deed for the formation of an HUF, it is advisable to execute one from a legal and taxation perspective.
3. It should have all the details, including the name of karta, co-parceners, address and source of
funds in the corpus, as well as the business of the HUF.
(III) Applying for PAN
1. Once the declaration deed is made, the karta should apply for a Permanent Account Number (PAN) for the HUF.
2. This is mandatory because all financial transactions of the HUF must carry PAN.
(IV) Opening a bank account
1. After you are allotted a PAN, open a bank account in the name of the HUF.
2. It is also advisable to get stationery printed for official communication.
3. The HUF is now functional, and the karta can now invest and file tax returns on behalf of the HUF.