A person can’t save more tax on earned income – like salary – once all the tax-saving options are fully exhausted. However, to save tax on unearned incomes – like rental income – and taxable returns on investments, the taxpayer may channelise the incomes by forming a Hindu Undivided Family (HUF).
But can anybody form an HUF to avail the benefit?
“An HUF can be formed by a married couple or members of a joint family belonging to Hindu, Jain, Buddhist and Sikh communities. Members belonging to Muslim, Christian or any other communities would not be eligible to form an HUF since HUF is created in accordance with Hindu Law,” says Dr. Suresh Surana, Founder, RSM India.
How to form an HUF?
Dr. Surana Explains the steps an eligible individual should follow to form an HUF:
Written Agreement/ Formation of a Deed
Creation of a HUF Deed is not mandatory as per law, however, it is recommendable that a written agreement should be entered into as it would aid in applying for PAN and other legal compliances. HUF Deed is a written formal legal document providing for the HUF family structure such as the Karta (eldest member of the family), co-parceners/ members of the family. Additions to the members of the HUF would be made by way of birth, adoption or marriage. Such deeds may also put forth the powers vested with the Karta to enter into transactions and manage the affairs of such HUF, objective or intention behind forming such HUF etc.
Allocation of Capital
The corpus of any HUF is generally formed by ancestral property, gifts from relatives, will, etc. Proper planning needs to be made with respect to the corpus of the HUF as once any property of the member is transferred in the name of the HUF, each of the members of the HUF would have an equal right in such property.
Application for a PAN
As HUF would have a PAN separate from its members, it is necessary to apply for a PAN for such HUF. Having a PAN aids in opening a bank account as well as filing Income tax returns of the HUF. Moreover, PAN is a mandatory requirement for entering into certain financial transactions and non-availability of the same may entail penal consequences. Hence, an application for PAN for the HUF should be made.
Opening of a Bank Account
Once the PAN has been allotted, a bank account can be opened in the name of the HUF wherein the transactions pertaining to the HUF may be carried out. It needs to be ensured that such a bank account is exclusively maintained for HUF transactions only.
