INQUIRY

05 Oct, 2016

Steps To Create HUF (Hindu Undivided Family)

An assessee is always concerned about the tax structure in relation to any form of business organization be it a sole proprietorship, company or a firm. In this regard HUFs are also a form of business organization through which an assessee can save taxes. Creating HUF is the best way to save taxes by an assessee. Forming an HUF does not involve huge legal or procedural formalities to be followed.

HUFs – Hindu Undivided Families are the form of organizations has separate legal entity for the purpose of tax assessment. The HUFs have been defined under the Hindu law as a family, which consists of male lineally descended from a common ancestor and included their wives and unmarried daughters. The relation of HUFs arises from the status not from legal contracts. Creating HUFs are the best possible way for an assessee to save taxes.

Schools of law under HUF – Two schools of law are there in order to create a HUF:

a)  Dayabhaga –It is prevalent in West Bengal and Assam. As per this school of law, the son acquires the right in the family property only after the death of his father.

b)  Mitaakshara– It is prevalent in rest of India under which, the son acquires the right in the family property right from his birth.

Steps involved in creation of HUFs –

1)  Capital and members – For an HUF to be created the major requirements is the capital and persons. Capital can be in the form of ancestral property, assets gifted by relatives and friends, or received by the HUF through a will. The minimum no. of members required is two who can be a husband and wife. Both the spouse can create a family and constitute a HUF. They don’t have to wait till they have a baby to constitute their HUF.

2)  Select a suitable name – The HUF to be created should have proper name. Select a proper name for the HUF and the name should not violate the laws or have any negative impact. The members can choose a suitable name before starting a HUF business form.

3)  Form a Deed – Formation of HUF should be embodied in a deed which provides that a proper legal deed or agreement is required before creating a HUF. The agreement/ deed should have all the details, including the name of Karta, co-parceners, address and source of funds in the corpus. Deed will facilitate that the business or the formation of HUF is valid and true.

4)  Apply for PAN – Application for PAN (Permanent Account Number) is also an important step to be undertaken while forming a HUF. After executing the deed, the Karta is required to obtain a permanent account number PAN for the HUF. Obtaining PAN is a mandatory requirement as all financial transactions shall carry PAN.

5)  Open a Bank Account – After PAN has been allotted, the Karta is required to open a Bank a/c in the name of the HUF.  It is also advisable to get some stationery printed for official communication. The HUF is now ready to function. The Karta will have to invest in tax saving instruments and file tax returns on behalf of the HUF. Only the money related to the business of HUF shall be invested in such Bank accounts.

Formation of HUF is no more a cumbersome process for any individual. Forming HUF can help you save taxes to an extent.

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