Formation of HUF for tax benefit

A Hindu Undivided Family (HUF) offers specific advantages as far as taxation is concerned. The Income Tax Act and Wealth Tax Act recognise 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. The Hindu Law defines the HUF as a family, which consists of males lineally descended from a common ancestor and includes their wives and unmarried daughters.

Members: An HUF is automatically constituted after marriage. It can also be formed by partition of an existing HUF into multiple units. A suitable name needs to be given to the HUF, taking into consideration the prevalent laws and the business that it intends to undertake.

Corpus: An important requisite for the constitution of an HUF is its corpus or capital. This capital is separate from the assets owned by its members. The property received by way of a will in favour of the HUF can become the corpus.

Deed: 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. It should include details of the karta, members of the HUF consisting of coparceners, and other family members, the corpus as well as the business of the HUF.

PAN: An HUF has a separate PAN and the karta must apply for one. The PAN needs to be quoted while making investments and carrying out financial transactions of the HUF.

Points to note

> The Hindu Law comprises two schools of law which govern the HUF. These are Dayabhaga school, prevalent in West Bengal and Assam, and Mitakshara school, which is prevalent in the rest of India.

> The karta must file the income tax and wealth tax returns on behalf of the HUF, in addition to his personal tax returns.

The content on this page is courtesy Centre for Investment Education and Learning (CIEL).