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POSTED BY ON March 9, 2012 1:35 am COMMENTS (41)
Hi Boarders,
Would you be able to comment on how to create a HUF (for Income Tax purposes) ? Specifically :
1. When can we create a HUF ? Do a person need to have a Male child or can a female Child suffices for the requirement of HUF creation.
2. Do we need to create or execute a deed / legal document ?
3. How would the bank account of HUF be opened ?
Thanks in advance for your valuable responses.
Regards
BFA
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Totally agree… No Gain with out pain 🙂
Dear Chaitanya, a personal question so you are going to open your HUF or not?
Thanks
Ashal
Hi Ashal,
I’ll open it for sure. But not in hurry right now as I feel this shud be done carefully from day 1 (and I’m in US next few months, so cant do it soon anyways), so in the meantime getting know-how and planning how I should do it:
– initial funding
– should I involve a CA for it or do it myself (trying to find end-to-end processes/concepts involved, so that I understand its complexity)
– trying to find out anyone that has already done it to ease it a bit for me and also know any drawbacks/challenges they faced
– tax returns: trying to find if efiling is possible, would this be as simple as ind’ return filing or is it different forms/process etc.
Please let me know if you or anyone in this forum opened one already and filed returns for it too… the more I know about this, more the new questions cropping up.
– Chaitanya
Dear Chaitanya, the question of return filing only arises when the income of your HUF is in taxable range i.e. more than 2L Rs. for current FY.
Yes you can E-file your returns.
Taking help from us or from a CA ‘ll be a personal call.
As & when you are back in India, first of all please procure a PAN Card for your HUF, as this ‘ll be a precondition in most banks to open a bank account in the name of HUF.
Thanks
Ashal
Dear Chaitanya, Thanks for your praising words. My take on HUF & the associated pain you are referring to – No Gain with out a pain.
For Your Information please – I’m a chem. engr. by profession & do not hold any degree, diploma or certificate in the field of finance.
Thanks
Ashal
Go thru’ the below link to know some not-so-good things about HUF, before you decide to register it by property-gift. Also consider the situations you would run into when its dissolved. I’m not saying HUF is a bad thing, its indeed very good; but we often tend to fall for short-term benefits something offers (in this case tax benefits), by not knowing the long-term impact (in this case an example is clarifications ashal provided in Mar 10, 2012 reply, you may have wanted a different %-share as kartha). So in addition to considering tax benefits you get in an year with HUF, also consider its long-term impact.. it should not become a burden when we are 50+.. it all depends on how the contributions are made to HUF from day 1 and maintaining its accounts. IT dept reviews HUF cases more thoroughly than individual cases, since they know the intentions of many ppl opening HUF, so plan carefully.
http://articles.economictimes.indiatimes.com/2011-05-30/news/29598912_1_hufs-partition-joint-family
Ashal, Terrific clarifications. I was planning to register HUF since a year but didnt had answers to many questions like above you replied to. Wondering if you are a CA?
Hello Group,
Here are the formats of the DEEDs should create
1. For formation of HUF
2. Initial Gift deed from father to son’s HUF a/c and the ack for the same from karta of HUF.
3. Gift deed from relative or a friend.
4. Partition deed when the co-parcener requested to split the HUF.
http://www.simpletaxindia.net/2010/07/huf-creation-deed-gift-deedpartition.html
Thanks,
Chakri
Dear BanyanFA, finally I’m able to pin point the details. Please check the below link –
http://taxworry.com/huf-2-positive-changes-under-finance-bill-2012-13/
Thanks
Ashal
Hello Group,
Then What would be your thoughts on this ? How to blow the HUF balloon? Suppose for example if I get 3L from my father to blow air into the HUF, then as per my understanding this whole amount will become the income of the HUF and it will be taxed accordingly though the donor is a relative of the karta of the HUF. But if I spend this amount for members eduction [my kid’s education], the LIC premium payment of the members of HUF then these payments/investments on behalf of the members of the HUF will come under 80C? if the Mediclaim premium paid by the HUF on behalf of the member of the HUF will this get exempted under 80D?
By the way I come across this post, which will explain like how to infuse the amount into HUF and how to manage it? but not sure how the latest amendments will effect this?
http://www.charteredclub.com/how-to-save-taxes-by-forming-huf/
Thanks,
Chakri
Dear Chakri, After the changes as done by Budget 2012-2013, even you or your wife can gift to your own HUF & blow the air heavily in to the balloon. The point to be noted, to avoid clubbing provisions, invest that gifted capital in the instruments, where tax liability is zero like PPF, Tax free bonds, Eq. MFs………
Yes HUF can pay life ins. prem. invest in the PPF accounts of the members of the HUF, Mediclaim prem., children education fee & claim benefits accordingly under section 80C & 80D.
Thanks
Ashal
Hi Group,
Any thoughts on the HUF ammendment made in the current budget ?
Regards
BFA
Guys,
There is a major update in this year’s budget for HUF’s capital. Under section 56 of Income Tax act.
Under the existing provisions of clause (vii) of sub-section (2) of section 56 any sum or property received by an individual or HUF for inadequate consideration or without consideration is deemed as income and is taxed under the head “Income from other sources”. However, in the case of an individual, receipts from relatives are excluded from the purview of this section and are therefore treated as not taxable. The definition of relative as given in this sub-clause is only in relation to an individual and not in relation to a HUF.
It is therefore proposed to amend the provisions of section 56 so as to provide that any sum or property received without consideration or inadequate consideration by an HUF from its members would also be excluded from taxation.
What would be your thoughts on this ?
Dear BanyanFA, I have to check the same as on from the budget day till now, I was busy & even went out station, now I ‘ll check the same & update you & all others for the meaning of this.
Thanks
Ashal
Dear BanyanFA, can you certify the info as I’m unable to locate the same in the budget speech. Please check the below link & read & locate the same for me in the budget speech.
http://www.cybex.in/india-budget/Budget-Speech-2012-2013.aspx
Thanks
Ashal
Apologies for yet another question :
I was wondering that what would be the tax treatment of a Non Resident HUF outside India. For example if Person X & Y have a HUF in India and Person X being the Karta lives in UK / USA. For Indian Tax purposes, X is a NRI and hence X’s HUF would also be a Non Resident.
X would have to declare his individual Global income in UK / USA. But what would be the status of X’s HUF income in the respective country (UK / USA) ? Would that get merged in X’s income or would it be considered seperate entity in India and not be required to disclosed in UK / USA ?
Regards
BFA
Dear BanyanFA, HUF can’t be NRI. The NRI status is available only for individuals. There is more to it, there is no concept of HUF in foreign land so question of acquiring assets & investments in the name of HUF & deriving income from them outside India is not possible. HUF’s Indian income is not in any way is to be clubbed with your global Income if you are holding NRI status & specially you have to report your global income for taxation in US.
Do not mix up with HUF’s income with your own income be it in India or in USA or any other part of the world.
I do hope, I’m able to clear your doubt. Please feel free to ask if you need more help.
Thanks
Ashal
Hi Ashal,
I believe that HUF also attains a NRI status if it’s Karta is NRI. It is clearly mentioned in the IT Act.
With regards to taxability of NRI HUF’s tax liability outside India, I think I also have the same thoughts as yours. HUF is a separate Legal Entity. Unless it gets proved that the Karta routed his own income into HUF, HUF’s income may not get clubbed with Karta in his IT Return outside India. However, it would be great if other boarders also express their views on this.
Regards
BFA
Dear BanyanFA, thanks for pointing out my mistake. it was a goof up from my side. Yes in case the Karta of HUF is having NRI status, HUF ‘ll al;so become NRI. Income issues are already discussed.
Thanks
Ashal
I have moved to Canada & become Canadian citizen –
can i now establish HUF in India & open NRO HUF account?
Thanks
I think you should hire a CA for that .
Gentlemen,
I went through the detailed blog note written by Manish and the discussion on the forum. I think I am now forced to think how would I create the initial capital in my HUF to allow it to generate investment income. I am not considering the Ancestral property because my father would not give it to the HUF.
Hence the options which I have are :
1. Have a mutual agreement with HUFs of my known friends. For example 5 of us open 5 HUFs and I give a 50K cheque as gift to the HUF for the welfare of the friend’s children. Well below the 50K limit (as I am a stranger for the HUF). Secondly perfectly justifiable reason to gift as I know the children and the gift was given with an element of love. In return each of the friends gift 50K each into my HUF towards the welfare of my child.
2. I gift my father & mother 50K each and they gift it to my HUF. Since it is within blood relatives, it is tax free for them and for the HUF.
3. I keep on adding small amounts to the HUF each year to HUF’s capital till it becomes sizeable enough to generate material investment income and at that point I don’t need to contribute to the capital of HUF.
What do you think ?
Regards
BFA
Dear BanyanFA, in the first year as there is no income to HUF, you may receive gift from any one with combined total up to 1.8L Rs. As it’s zero tax limit for HUF. No need to file tax return in this case. If you raise the bar a bit, you may receive gift up to 2.8L Rs. & invest 1L Rs. in 80C instruments & thus tax liability is zero. Invest another 20K in Infra bonds & you go for total 3L Rs. gift in the first year with out paying a penny income tax, although full 3L Rs. received as gift is taxable income. Yes in this case Income Tax Return filing ‘ll be a must.
Option 2 already discussed with dear justgrowmymoney.
Option 3 is not possible as you can’t transfer your own capital to HUF. Any income dereived from such investments ‘ll be clubbed to your income & thus ‘ll become your income & taxed accordingly.
Thanks
Ashal
Ashal,
I’d like to add another option 4, the father can give [gift] cheque to the son’s HUF a/c by mentioning that “for the creation of my son’s HUF a/c”. I’m not cent percent sure that the cheque given by father to son’s HUF can be treated as gift or just like donation to encourage the son to create HUF. This can happen though the father is not having any HUF at his level.
If the father of the family is not available any other relative can give this gift or donation from his HUF a/c to this newly created HUF a/c.
Thanks,
Chakri
Dear Chakri, For the first time, it’s possible to get gift either from mother or father or any other relative to create base capital of HUF.
Thanks
Ashal
Ashal – My spouse is working
Dear justgrowmymoney, I case your spouse is in 10 or 20% tax slab, you may divert that loan funding to HUF from your spouse to HUF, from her own capital.
Thanks
Ashal
Great Thanks Ashal, your responses got me thinking.
HUF is too attractive an option for tax savings – need to explore more and if get my HUF to run successfuly will come back to the board and update!
Dear Justgrowmymoney, a personal question but linked to this HUF discussion, What’s the status of your spouse? I mean working or home maker?
Please update the same.
Thanks
Ashal
So what can be the sources on income for a HUF apart from ancestral real estate/property, ancestral jewelery and gifts from others? Literally put how can one legally move money into a HUF.
Dear justgrowmymoney, other than the modes, pointed out by you, the only options left is to give loan from the lowest income slab member to HUF.
Thanks
Ashal
Thanks Ashal.
In the gifts from other category:
A) Gifts to close relatives is tax free. So If I gift my mother 1.9 lacs and she in turn gifts it to my HUF will that be fine?!
B) Alternately I can gift 1.9 lacs to my friend’s HUF and he can gift 1.9 lacs back to my HUF?!
Both the above sounds easy but are they allowed?
Dear justgrowmymonwey, if the gifting is from your hUF to friends HUF & from his to yours’ it ‘ll be taxable income if the gift ‘ll be more than 50K value. Under that 50K clause, it’s possible but may raise doubts for income tax people & later on may invite troubles for both of HUF.
Regarding gifting from mother to HUF, it’s a grey area again as HUF can’t have defined blood relatives which are eligible to give tax free gifts to an individual.
Yes your mother can very much loan that amount to your HUF. How much interest is to be charges on such loans ‘ll be a personal affair.
Thanks
Ashal
Dear BanyanFA, please check the article as link provided by dear Manish. Here are my answers for your direct queries.
1. No child is required at all. The moment a male & a female Hindu (It includes Jain & Sikhs also) marry & become a family post their marriage, the HUF is formed automatically. Yes the children in future born either from this couple or linear descendant ‘ll become member of this HUF till 4th generation.
2. For bank account opening purpose – banks may demand a declaration deed. Please prepare it on a 100 Rs. Stamp Paper. It ‘ll be like this –
Quote –
I BanyanFA, aged ……., R/O …………. do hereby declare that I’m the Karta of BanyanFA HUF. At present the HUF consists of the following members –
Name of Wife Date of Birth
Name of Child 1 D.o.B.
Name of Child 2 D.o.B.
I do here by declare that whatever stated above is true to the best of my knowledge & belief. Declared this on …… day of March 2012.
Sign. of Witness Sign. of Karta of HUF
Put a rubber stamp of HUF
Unquote –
Whereever you ‘ll sign in capacity of HUF’s Karta, a rubber stamp is required. The stamp ‘ll read
BanyanFA (HUF)
Karta
3. To open a bank account, Demat account, it’s advisable to apply for a PAN Card first. To apply for a PAN Card of HUF, please provide Identity Proof (any ID proof other than his own PAN Card) & address Proof of Karta.
Please feel free to ask for more help if you need so.
I’m sorry to post a lengthy answer but it was necessary to answer your queries.
Thanks
Ashal
WOW. Excellent one Manish. Good refresher to read this back here after few months!
Is the following a practical proposition?
If I just keep moving the minimal tax exemption amount each year to a HUF and park most of the funds in long term yields like a 9.5% FD and do some minimal tax savings via ELSS the return could grow tax free legally and I can just keep consuming that income for my monthly expenses. Is this correct?
On another note I believe HUF cannot invest in PPF any more. Is that right?
Dear justgrowmymoney, you can’t divert your own capital to HUF. So the practice you want to implement is not possible.
HUF can’t invest in it’s own PPF account but it may invest in the PPF accounts of the members of the HUF on their behalf & may claim tax benefit.
Thanks
Ashal
An article is done on this topic – after reading the article again put some more questions which you dont get out of article : http://jagoinvestor.dev.diginnovators.site/2011/10/huf-creation-and-saving-tax.html
Hi Manish,
I am a CA and understand the Tax part around HUF. However, what makes me uncomfortable with regards to HUF concept are :
1. How can I use HUF’s money ? End of the day if I am creating a vehicle to save tax and generate wealth, I need to use that wealth as well. Other than insurance examples detailed in your blog, can you give more examples of using HUF money which doesn’t raise eyebrows of the Tax man ? Can things like school fees of kids, family monthly living expenses, etc. be paid out of HUF’s bank account ?
2. You mentioned about the fact that coparcenors can ask for a breakup of the HUF and in that case the funds of the HUF would be split between the coparcenors. I am assuming that the share of the coparcenors is mentioned in the HUF deed.
Regards
BFA
I personally dont have so much details about HUF . You should write to Karan Batra who is also a CA and would be able to answer things in details . Somethings which I can say is
1. Tution Fees : there is no point of paying it from HUF , because for tutuion fees the tax advantage is only available to invidual and not HUF , same case would be there for anything is generally for an individual like Insurance premium etc .
2, Even if you pay living expenses from HUF account, what will you achieve.. For taxation purpose, what will matter is income, not expenses, so if income is 10 lacs , but expenses are 5 lacs, the expenses does not matter here , the tax will be applicable to whole 10 lacs . JUst like it happens in case of an individual .
Manish
Hi Manish,
Thanks for your response. However, the element which I was looking after was not taxation. Lets take that I have a sizeable capital within HUF which is now generating a good income. I am also doing efficient tax planning for this HUF’s income. However, how can I use this income ? Can I just draw a cheque from HUF’s bank account and credit it into my bank account ? Can I pay for the expenses of a family holiday from HUF’s account instead of my personal account.
Simply putting it, what is the use of HUF if I can’t use the funds in HUF. Hence trying to understand how can I legally use it without raising any legal eyebrows either from the Hindu Act or Income Tax Act ? Should I raise this question to Karan Batra ?
Regards
BFA
Dear BanyanFA, yes the holiday funding or all other expenses which you want to do from HUF’s income can be done.
Thanks
Ashal
Dear BanyanFA, let me try to answer your queries. I think you were discussing to meet out expenses in general where as dear Manish is talking exclusively for the 80C benefit on tuition fee for children.
1. Yes the routine family expenses can be done from HUF money or should I say HUF’s income from it’s investments. FYI – the prem. paid for life & health policies for the members of HUF are eligible for sec 80C & 80D benefits for HUF. Interestingly, HUF is not allowed to open or operate a PPF but in a family of four, Husband (working), wife (working), 2 minor children, HUF may invest in all 4 PPF accounts in a such a manner, that in total 3L Rs. 80C tax benefit can be availed from PPF investments against these 4 accounts. 1L for husband from his own source, 1L for wife from her own source & 1L for HUF from it’s own income.
2. In case of break up/split of HUF, each member of the family is eligible for equal share. In the example above, if the 2 minor children (one is son & 1 is d’ter) become major & married & this is the final situation –
Husband & wife
Son, wife, 2 minor children
D’ter; Husband, 2 minor children
In this case, the HUF consists of following members –
Husband, Wife, Son, Son’s wife, Son’s children, D’ter
Total 7 members.
So the partition amount ‘ll be 1/7 to each of them.
In case Son decides to receive his family’s combined share in a new HUF of his own, he may do so. So in this case, his new HUF ‘ll get 4/7 part from the old HUF.
Thanks
Ashal