HUF Deed: How to Set-Up a HUF?

The Hindu Undivided Family (HUF) Deed is the most crucial document in the complex structure of the Indian Income Tax Laws and managing the finances. HUF Deed is a simple and most powerful legal document establishes the existence of HUF, defines the rights and obligations of the members and their shares. Crafting a tax compliant HUF Deed is an essential step for families exploring to optimize the tax and ensure a simple and structured approach towards the assets management which are shared amongst the members.

This article will explain the basics of the HUF Deed, its importance and how it is a tool for financial planning and family harmony.

What is a HUF Deed?

A HUF Deed is a significant document in the formation of a HUF. The Indian Income Tax Law recognizes HUF as a separate legal entity. The HUF Deed serves as legal evidence for families pooling their earnings, resources, and assets for conducting the family business. Through HUF Deed, the entity for conducting the business is established, members are specified, management and operational guidelines are also provided.

Hindu Undivided Family (HUF): An Introduction

A Hindu Undivided Family or a HUF, is recognized by the Indian Income Tax Law as a distinct legal entity which represents the joint family system. It comprises the family members lineally descended from the same ancestor, and includes their wives and unmarried daughters. The HUF concept is deeply rooted in the Hindu Law and is used for maximizing the income tax benefits and managing the wealth.

Benefits of Forming a HUF

Setting up a HUF offers a strategic way for Hindu families for managing their wealth and tax obligations effectively. With proper setup and management, a HUF can serve as an important tool for accumulating wealth, tax planning, and facilitating financial stability for future generations. Benefits of forming a HUF are listed below:

Income tax benefits: Under the Income Tax Act, the HUF is treated as a separate legal entity, which allows additional benefits of tax deductions and exemptions under the Income Tax Act. Thus, with the formation of a HUF, the tax burden on each family member of the HUF is reduced effectively.
Asset management: Usually, the head of the family is given the charge to manage all the assets of the HUF. The centralized management of families assets and properties facilitates better control and efficiency.
Succession planning: A HUF facilitates the smooth succession planning since the assets are transferred within the family without much hassles.
Separate legal entity: Since HUF is recognized as a separate legal entity, it can borrow, lend, and own a property, facilitating financial flexibility to the family.

Steps for Forming a HUF

Following are the steps to form a HUF:

Creation of the HUF: The creation or formation of the HUF begins with the senior-most male member of the family, also known as ‘Karta’, expressing his intention to form the HUF.
HUF Deed: A HUF deed is the cornerstone of the HUF. It provides the details of the members of the HUF, their shares, and the business of the HUF. Though the HUF deed is not mandatory, it provides clear documentation.
PAN Application: For income tax purposes and undertaking financial transactions, it is essential to apply for the Permanent Account Number (PAN) of the HUF.
Opening the Bank Account: To manage the finances of the HUF effectively, it is necessary to open the bank account in the name of the HUF so formed.
HUF Registration (Optional): To have a strong legal existence, it is essential to register the HUF, especially for business purposes.

The Karta: Role in HUF

Generally, the eldest male member of the family is appointed as the ‘Karta’. The Karta acts as the manager and the guardian of the HUF. He is authorized to take important decisions impacting finances of the HUF. These decisions are in the nature of HUF’s assets, investments, and other finance-related matters. The role of Karta is crucial in the HUF as he is responsible for the well-being of all the members of the family.

Members of HUF

Members of the HUF include all males who are lineally descended from a common ancestor and also includes their wives. Unmarried daughters can also become the members of HUF. While, after marriage, the daughters can be a part of their husband’s HUF. All members have an equal right towards the assets and income of the family, managed by Karta.

HUF Deed: Detailed Contents

Following essential elements form a part of the HUF Deed:

Title and Date: The HUF Deed should specify the title, mentioning the purpose of its formation and the date of formation.
Declaration: The HUF’s Deed begins with the expression of the family members declaring their intention to form a HUF.
Details of Karta: The name and details of the Karta, responsible for managing the HUF should be specified.
Member Details: The names and relationship of the members of the HUF to the Karta, should be mentioned in the HUF Deed. This section also specifies the share of the members.
Capital Contribution: The source of the initial capital contribution of the HUF, whether through the ancestral properties, gifts, or contributions from members should be mentioned in the HUF Deed.
Business Scope: If the HUF is formed to conduct the business, the HUF Deed should mention about the nature and scope of the business activities.
Operating Bank Account: The HUF Deed should specify the guidelines for operating the bank account typically by Karta.
Members Rights and Liabilities: The HUF Deed should also comprise of the section which should provide the details of the rights and liabilities of the members regarding the use of assets and share in the income.
Succession: The HUF Deed should also specify the provisions for the succession of HUF to Karta’s position in case of death or incapacity of Karta.

HUF Deed: Steps for Making a HUF Deed

Drafting a HUF Deed involves several steps to ensure it meets the legal requirements and accurately reflects the family’s intention:

Consultation: Before forming the HUF, it is advisable to consult with the legal expert or a Chartered Accountant to understand the tax implications and structure of the HUF.
Drafting the HUF Deed: After obtaining the consultation, the HUF Deed can be outlined considering the details mentioned in the above step.
Signature and Witnesses: The Karta and all the adult members of the HUF should sign the HUF Deed in the presence of at least two witnesses.
Notarization: Though notarization is not mandatory, however, it strengthens the legal position of the HUF Deed.
Stamp Paper Preparation: The HUF Deed should be prepared on the appropriate value of the stamp paper which is based on the State in which the HUF is formed.

Registration of a HUF Deed

Though registering the HUF Deed is not mandatory, still doing so can enhance the legal status of the HUF. It will benefit in the long-run where the HUF is engaged in significant business activities or holds considerable assets. The process of registering the HUF Deed varies based on the local or State laws but usually involves submission of the Deed to the Sub-Registrar’s Office along with the applicable fees and documents.

Tax Compliances for a HUF

HUFs must comply with the tax provisions for the F.Y. 2023-2024. The compliance of income tax for HUF is more or less similar to the individual taxpayers. Understanding these compliance and the monetary limits is essential for HUFs to stay compliant with the tax regulations and gain maximum benefits available to the HUF.

Income Tax Return Filing: HUFs must file the Income Tax Return (ITR) if their gross total income exceeds INR 2,50,000 before claiming deductions under Section 80C to Section 80U. The last date for filing ITR is the same as that for individual taxpayers, that is, July 31, 2024.
Audit Requirements: HUFs must have their accounts audited if their total sales, turnover, or gross receipts exceeds INR 1 Crore or INR 50 Lakhs during the F.Y. 2023-2024. Businesses opted for presumptive taxation scheme under Section 44AD, having more than 5% of transactions in cash, has the tax audit requirement limit of INR 2 Crore.
Advance Tax Payments: If the total tax liability after TDS exceeds INR 10,000 in the F.Y. 2023-2024, HUF must pay advance tax. The advance tax should be paid in four installments, that is, 15% on June 15, 45% on September 15, 75% on December 15, and 100% on March 15 of the financial year.
Tax Deducted at Source (TDS): When a HUF sells a property for a sale consideration in excess of INR 50 Lakhs, TDS becomes applicable. The buyer of the property must deduct 1% TDS from the transaction value.

If the rent paid by the HUF during the year exceeds INR 2,40,000, TDS at the rate of 5% is to be deducted from the rent paid.

Tax Collected at Sources (TCS): TCS provisions are applicable to HUFs involved in specified receipts. The rates and conditions depend on the type of transaction and are subject to the eligible criteria set by the Income Tax Department.
Presumptive Taxation Scheme: The presumptive taxation scheme under Section 44AD can be opted by the HUF if their total turnover or gross receipts are less than INR 2 Crore. Professionals have a limit of INR 50 Lakhs for presumptive taxation scheme under Section 44ADA.
GST Registration: HUFs engaged in the supply of goods and services must obtain GST registration if their turnover exceeds INR 20 Lakhs (INR 10 Lakhs for North Eastern and Hill States) in the F.Y. 2023-2024.

FAQ

Q1. Explain a HUF Deed.

A HUF Deed is a formal legal document outlining the creation of the Hindu Undivided Family (HUF) for tax purposes. A HUF Deed mentions the details of the Karta and the members of the HUF along with the assets forming part of the initial corpus amount.

Q2. How is an HUF formed?

At the time of a Hindu marriage, a HUF is formed automatically. However, for getting recognition for tax purposes, it is essential to create a HUF Deed, open a bank account of HUF, and apply for HUF’s PAN.

Q3. Who can be the members of a HUF?

Members of the HUF are all individuals lineally descended from common ancestors, their wives, and unmarried daughters.

Q4. Can a HUF own a property?

Yes. A HUF is considered as a separate legal entity in the eyes of law and thus can own a property also. However, the property must be obtained from the income of the HUF or has been in the name of the HUF received as a gift, will, or inheritance.

Q5. How does a HUF file an Income Tax Return?

A HUF is treated as a separate legal entity for income tax purposes and must file its own income tax return. The responsibility for filing the ITR lies with the Karta of the family.

Q6. Explain the tax benefits of forming a HUF.

The tax benefits of HUF is similar to that of the individual, including deductions, and exemptions under various sections of the Income Tax Act. This leads to significant tax savings for the family.

Q7. Can a HUF be dissolved?

Yes. A HUF can be dissolved through the partition deed. Upon dissolution, the property of the HUF is divided amongst the members in the ratio of their shares.

Q8. Explain the role of Karta in HUF.

Karta is the head of the family and the manager of the HUF. He is responsible for managing the entire HUF, including the assets and liabilities of the HUF. He represents HUF in all legal and financial transactions.

Q9. How to create a HUF Deed?

To create a HUF Deed, it is necessary to consult the legal expert who can draft the document correctly mentioning the details of the members, assets of the HUF, declaration of the Karta. The HUF Deed should be signed by all the members in the presence of two witnesses.

Q10. How are the assets of the HUF taxed?

Income earned from the assets of the HUF are taxed in the hands of the HUF only. This income is not charged to tax in the hands of the members, thus allowing an efficient tax planning.

Q11. Can a daughter be a Karta of the HUF?

If daughters are the coparceners of the HUF, having an equal right in the property of the HUF, can also be a Karta of their father’s HUF. This is supported by the landmark judgment of the Supreme Court.