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HUFs are taxed as separate entities
Over the past few months, we received investor queries about how one can put in place a Hindu Undivided Family (HUF) structure, various legal aspects and operational issues related to the same.
How is an HUF formed?
An HUF is a legal expression, which has been employed in taxation laws as a separate taxable entity. An HUF can comprise large, small or nuclear families. Although only one member or coparcener cannot for m an HUF, the property held by a single coparcener does not lose its character of joint family property solely for the reason that there is no other male or female member at the time. Once the coparcener marries, an HUF comes into existence as he along with his wife constitutes a joint Hindu family.
Who can give seed money?
After creation of an HUF, an application for an income tax PAN is made and subsequently an HUF account is created. The coparceners and members, including the Karta (the person who manages the affairs of the family), can transfer money into the HUF account and other assets can also be transferred to the HUF.
Who can give a gift to an HUF?
Gifts can be received from members, relatives who are non-members and also from strangers up to a certain limit.
Who can withdraw from an HUF? And for what purpose?
The Karta controls and becomes the custodian of the finances of the HUF. He can borrow money for and on behalf of HUF and can also spend money for the family and is not accountable for it.
What is the role of Karta?
Usually, the senior most male member of the family is Karta in an HUF, even if he is aged or incapacitated. In case the senior most member is not the Karta, then the next senior male member takes over as Karta. However, a junior male member can also act as the Karta with the consent of the other members. The Karta can claim remuneration and other benefits from the HUF.
The Karta manages the affairs of HUF, controls and becomes the custodian of the finances, can borrow money for and on behalf of HUF, spend money for the family, can make partition of the family. However, an HUF cannot enter into contracts, or form a partnership firm, or represent the family except through the Karta. On his part, the Karta may allow others to represent the HUF, can gift assets of HUF to family, but all those should be within reasonable limits. The Karta can alienate the joint family property with the consent of the coparceners and if all the coparceners are adult, the alienation is binding on the entire joint family.
What is the status of an HUF after the death of the Karta?
On the death of the Karta, the HUF can continue with the next senior male member taking over as the Karta.
Can a family property be part of HUF after death of parents?
Yes, that is possible.
How are investments done under an HUF structure?
Investments by an HUF are made by the Karta either in his own name or in the name of the HUF. The HUF as an entity cannot invest in government's small savings schemes, such as PPF, NSC, monthly income schemes, recurring deposits and other time deposits. An HUF account cannot be opened with joint holders and no nominee can be appointed for an HUF account.
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