What is an HUF Account?
HUF implies Hindu Undivided Family. It comprises all people in a family, including wives of sons and unmarried children, who are lineal descendants of a common ancestor. By forming a family unit and accumulating funds to form a HUF, taxes can be saved. HUF is taxed independently from the members thereof. A family of Hindus can come together and form a HUF. A HUF may also be created by Buddhists, Jains, and Sikhs. HUF has its own PAN and, irrespective of its owners, and files its own tax returns.
How to open a HUF account?
An HUF automatically comes into existence on the day that a person gets married. However, for various legal and financial aspects it is always advisable to prepare an agreement, known as the HUF deed. This deed is usually required by the banks and the income tax department.
The following steps may be followed for forming an HUF.
- As a first step, an HUF deed should be prepared. This is an agreement on a stamp paper which states the names of the Karta (head of the family) and the coparceners (other members of the HUF). The Karta of the HUF is the eldest male member in the family.
- Once the deed is in place, the HUF should apply for a PAN card in the name of the HUF.
- The final step is opening the bank account for the HUF.
Once all of the above steps are complete, the HUF becomes a separate legal entity. Any payments received in the HUF account are taxed separately and not in the hands of any of the individual members.
As mentioned earlier, the HUF Karta is the most senior male family member and can also be considered the family manager in financial terms. A corpus is established in this HUF account where any member of the family can pool their money. Karta (head of the family) will be allowed to manage the corpus. Karta's signature would be needed for any bank transaction.
Documents Required for HUF Account Opening:
- HUF would have a separate PAN card; it should produce this PAN card along with Karta's PAN to open the account.
- A declaration form will be issued, where each member has to sign indicating the name of the Karta.
- The other members are the only HUF participants, also known as coparceners.
- Karta, to have absolute control over the HUF account
- Any transaction made by each member of the family on behalf of the HUF account is controlled by Karta.
- Karta's Residential Proof
- Karta's Identity Proof
- Apart from the points listed above, depending on the bank where the HUF account is opened, there might be other documentation or provisions.
Rules for the HUF account
There are some basic rules for the HUF account:
- Only a co-parcener or one member cannot form a HUF.
- Only one male member is enough to form a HUF account. It is not mandatory to have two or more male members to open an account.
HUF Tax Benefits
Since the account is comparable to an individual's account there are numerous tax benefits.
- As per the IT Act, tax rebates and exemptions may be eligible for the HUF account under Sections 80C.
- Collected gifts of up to Rs 50,000 would be tax-free. A father who owns a HUF account can give a higher value property or money to a son who holds a smaller HUF account, but he should state that the gift is for the HUF of the son and not to him. In those cases, tax benefits can be enjoyed under sections 64(2) and 56(2).
- For investing in tax-free money instruments, the corpus can be used.
Although HUF as a family sounds like the best way to save tax, it comes with its own disadvantages.
- Fair rights of members: the biggest downside to opening the HUF is that its members are entitled to equal rights to possession. Without the consent of all the members, the common property can not be sold. By means of birth or marriage, every contribution to the family becomes a part of the HUF and enjoys equal treatment. An HUF can become too massive to handle.
- Joint family system loss of relevance: HUF was regarded by the income tax department as a single taxable entity. HUF, though, is losing importance in today's times, where nuclear families are the norm. Several instances where partners or families fight it out on typical household expenses have come to light, forgetting to pool funds. Divorce rates are increasing and the HUF is thus losing value as a tax vehicle.
- Partition: The worst scenario of opening a HUF, maybe, is shutting it down. A partition is the only way a HUF can be dissolved. Both members must consent to get the HUF disbanded. Resources are assigned to members under a partition, which can lead to a lot of conflicts that can be a great deal of legal hassle.
Can HUF open a PPF account?
HUF is not allowed to open tax saving account like tax saving FD, ELSS mutual funds, or PPF account.
But it can claim tax deductions on the amount deposited in the PPF account of its members of up to Rs.1.5 lakh under Section 80C of the Income Tax Act,1961.
Can HUF open a savings account?
Yes, HUF can open a savings account in any bank. Along with a savings account, it can also current account, or a term deposit account. HUF can also open account which is related to borrowings like a term loan, cash credit, etc.
Frequently Asked Questions (FAQs)
1. Who is the Karta in HUF?
The senior-most male member of the family is the Karta in an HUF account.
2. Can women become Karta in HUF?
Until 2016, female members of a family were not allowed to become Karta. But the Delhi high court in a case in 2016 stated that the eldest female member of the family, being a co-parcener in an HUF is allowed to become Karta.
3. Is HUF a separate legal entity?
Yes, HUF is a separate legal entity and has its own documents like pan card, bank account, etc.
4. How is a HUF taxed under the Income Tax?
HUF is taxed at the same rates applicable to individuals as per the income tax slab rate under the Income Tax Act, 1961.
5. Does the HUF account also include children?
Yes, children can also be a part of the HUF account. Every person in the family is eligible to be a part of HUF.
6. Is an HUF taxed with the Karta?
No, HUF is not taxed with the Karta. Both the HUF and Karta are taxed separately under the Income Tax Act, 1961.
7. Who becomes the Karta after the death of the Karta?
The eldest male member of the family will become the Karta even if the previous Karta’s Wife is alive.
8. Can NRIs become the Karta of the HUF?
Yes, the NRIs can be the Karta of the HUF. Also, the HUF will be considered as the Non-resident.
9. What does the HUF deed have?
It is mandatory to prepare an HUF Deed. HUF deed is an agreement on a stamp paper that includes the name of Karta, members (and co-parceners) & business details of the HUF.
10. Can an HUF and the HUF members both claim tax deductions?
Yes, Both can separately claim the tax deductions under section 80C of the Income Tax Act,1961. However, they cannot claim the tax deduction for the same investments.
11. What is the difference between Coparceners and Members in the HUF?
A person who acquires an interest in the family by birth is the coparcener. While the wife of any of the members of HUF will be just a normal member of the HUF. She cannot be a Coparcener. Also, Coparceners have the right to enforce the partition of the HUF, while a normal member does not have the right to enforce the partition.
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