14-12-2014

PRESENTATION ON HUF

Prepared by: CA Sagar Kakkad

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WHY AN HUF?

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 Because you can save up to INR 5
Million in Present Value Terms !!
 Assumptions
1. Your current age is 30 years and your life expectancy is 70 years
2. Government increases the basic exemption limit by average INR 25 k per
year and deductions by average INR 5 k per year with no other
significant change in tax rates or slabs (which is quite conservative)
3. Inflation / Post tax rate of return on investment is 7% p.a. for discounting
purpose.
4. You are able to utilize the full potential of savings available through
HUF.

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HOW IS IT POSSIBLE?

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 An HUF is treated as a separate entity under the Income Tax Act, 1961;

 Basic Exemption Limit of INR 200 k;

 Benefit of slab rate of tax of 10% on incremental income up to INR 500 k and
20% on further incremental income up to INR 1 Million

 Deduction under section 80C of the Act of INR 150 k for certain investments
in the name of its members (LIP, DAP, PPF, ULIP);

 Deduction under section 80D of the Act of INR 15 k for insurance on health of
its members;

 Deduction under section 80TTA of the Act of INR 10 k for interest on savings
bank account;

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OTHER BENEFITS UNDER INCOME TAX ACT

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 Income received by members from HUF property or income, exempt u/s. 10(2)
in the hands of member;

 Benefit u/s. 23(2) of the Act for one self occupied property for the own use of
the family;

 Deduction u/s. 24(b) of the Act up to INR 200 k for interest on loan for
acquisition of self occupied property;

 Presumptive taxation of business income u/s. 44 AD;

 Distribution of capital assets on total or partial partition of HUF not

regarded as transfer u/s.47(i) – no capital gain to HUF;

 Exemption from capital gains u/s.54 (residential house property), 54B (rural
agriculture land), 54F (investment in first or second residential house),
10(37) (compulsory acquisition of urban land);

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OTHER ASPECTS UNDER INCOME TAX ACT

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 Gifts up to INR 50 k not taxable u/s.56 (2) (vii), however if amount
exceeds 50 k, full amount is taxable. (HUF does not have any relatives,
hence taxable gift up to basic exemption limit can be taken from relatives
of members);

 Clubbing of income in case of individual property thrown into family

hotchpot by any Member of HUF u/s. 64(2);

 Benefit of adjustment up to basic exemption limit from taxable short

term capital gain u/s.111A or long term capital gain u/s.112;

 Partial partition of HUF is not recognized under income tax law, HUF
continues to be assessed in the status as such.

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HOW CAN YOU CREATE YOUR HUF?

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 HUF is creature of law and automatically comes into existence on the
marriage of a Hindu male.

 Birth of a child is not necessary for the purpose of recognition of the

status of HUF.

 HUF can acquire properties by partition of larger HUF or ancestral

property or by way of Gift (however gift by members attracts clubbing
provision)

 So if you are married and does not have any capital into your HUF, your
HUF still subsists and you can infuse capital by way of gifts.

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HOW CAN YOU INFUSE CAPITAL INTO YOUR
HUF?

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 For an HUF consisting of only husband and wife; which on the date of
marriage does not have any ancestral property or property received on
partition of larger HUF can get it only in the form of gifts.

 There are two different views expressed by courts:

 An HUF with only one coparcener can accept gifts in the status of HUF
 An HUF with only one coparcener can not accept gifts in the status of HUF because
the single coparcener has all the rights over the property as Individual.

 To be conservative, you can go with the second view, once a child is born
(male / female) gifts can be taken from anyone within the basic
exemption limit every year (ideal way would be to take gifts from your
father or mother)

 Any accretion to the income of HUF is its own property and there are no
clubbing provisions for the same.

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HOW CAN YOU TAKE TAX BENEFIT?

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 Once you are regularly infusing capital into your HUF, your HUF will
have its own property which will earn income in the form of interest, etc.

 Income of HUF is taxable in its own hands separately from Individual.

 So you can take all the benefits under Income Tax Act, 1961 with respect
to the income of the HUF as mentioned in the aforesaid slides while
filing the income tax return of your HUF.

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PRACTICAL ASPECTS

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 Make a declaration of HUF (an affidavit on a stamp paper of INR 100)

 Apply for a PAN card in the status of HUF

 Open a separate bank account in the name of Karta on behalf of HUF

 Make formal gift deeds in respect of gifts received from relatives of

member (the source of gift for the donor should also be recorded)

 Maintain Separate books of accounts for HUF

 Keep the individual money and property separate from those of HUF

 File annual return of income for the HUF claiming the benefits

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DOCUMENTS REQUIRED FOR PAN

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 Proof of Identity of Karta
 Proof of Address of Karta
 Proof of Date of Birth / Marriage of Karta
 For HUF, an affidavit made by the Karta of Hindu Undivided Family
stating name, father’s name and address of all the coparceners on the
date of application and copy of any of the above documents in the name
of Karta of HUF is required is required as proof of identity, address and
date of birth.

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DOCUMENTS REQUIRED FOR BANK ACCOUNT:

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 Bank account should be in the name of HUF
 Photograph of Karta
 Proof of identity, address of Karta
 Pan number in HUF's name
 HUF Declaration : A declaration form where every member has to
make a signature stating the name of Karta and declare
 They are the only members of HUF.
 Karta to have sole authority over HUF account
 Every transaction on behalf of HUF account, made by each member of
the family is governed by karta.

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DOCUMENTS REQUIRED FOR DP ACCOUNT:

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 Photograph, ID, Address proof of Karta
 Bank Statement in the name of HUF, Cancelled Cheque
 PAN card of HUF
 List of co-parceners in the HUF, along with an authorization
given to the Karta by the said co-parceners to open and operate
the DP and Trading accounts.
 DP should be HUF DP A/c

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 14-12-2014
POINT TO BE NOTED FROM HINDU LAW
TO BE KEPT IN MIND BEFORE IMPLEMENTING

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RISKS INVOLVED:

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 HUF property can not be transferred by WILL, Karta cannot sell
the property and dispose the proceeds in his individual desire.

 Family can decide mutually for disproportionate distribution

among members by partition through mutual consent.

 Any coparcener can ask for partition and equal share from the
family property.

 In case of court dispute provision of Hindu Law shall apply.

 Therefore, there are chances that you may end up spending INR
100 to save tax of INR 30, this aspect needs to be kept in mind
while indirectly throwing personal property into family net.

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 14-12-2014
GENERAL ASPECTS

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WHY IS AN HUF TREATED SEPARATELY?

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 Despite being a Secular country, Indian constitution allows Hindus,
Muslims, Christians and Parsis to be guided by a separate Personal
Law. As such the concept of HUF is only privy to Hinduism only.

 It originated from the culture of joint family status and common

assets among Hindus.

 HUF is treated as a separate entity (person) under Section 2(31) of

the Income Tax Act, 1961 and section 3 of the Wealth Tax Act, 1961.
Many of the tax exemptions or deductions available to an individual
are equally available to an HUF separately under the tax laws.

 The Hindu Law contains separate rules for distribution of properties

of an HUF different from those for the property of an Individual.

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WHO IS A HINDU?

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 The term Hindu was originated to designate the countries and
population situated around and near the river “Sindhu”, it was first
used by Iranians. Persians termed it as “Indus”, Greeks borrowed it
as “Indos”, English as “Indus” and Romans as “India”.

 Article 25(2)(b) of the Constitution stipulates that “the reference to

Hindus shall be construed as including a reference to persons
professing the Sikh, Jain or Buddhist religion.”

 Therefore, the term “Hindu” under the law means:

 A person who is a Hindu by religion, including its various forms
like, Virashaiva, Lingayat or Brahmo Samaj, Prarthana Samaj or
Arya Samaj;
 A person who is a buddhist, Jain or Sikh by religion;
 Any other person who is domiciled in India but is not a Muslim,
Christian, Parsi or Jew by religion.

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WHAT IS A HINDU UNDIVIDED FAMILY?

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 In general, HUF means a body of persons lineally descendant from a
common ancestor including their wives and unmarried daughters, who
are staying jointly.

 The head of the family who is the eldest male member generally is
treated as Karta of the HUF. Karta is entrusted with the duty of
management of the HUF assets for the benefit of the family.

 Members lineally descended from the common ancestor up to four degree

are Coparceners of HUF. Any coparcener can ask for partition of HUF.

 After amendment to Hindu Law in 2005, daughter born in the family

also acquires same right as son of being a coparcener and continues to be
so even after her marriage.

 Wives and mother are members of the HUF but not coparceners.

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 14-12-2014
THANK YOU

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