HUF Formation
A Hindu Undivided Family (HUF) is a kind of an entity that could be a launching pad to the entrepreneur who wishes to have a smoother foray into the world of business, thanks to the tax benefits and lesser compliance requirements.
HUF is a unique type of legal entity which derives its roots from Hindu Law. HUF is an entity as a family, which consists of male lineally descended from a common ancestor. The members of the family would also include their spouses and unmarried daughters. Given the nature of the entity, the relation of HUF’s arises from status and not legal contracts. This article seeks to guide the aspiring entrepreneur on the formation of a HUF.
Members
A HUF could be formed by a married couple, whose child would be integrated into the entity after his/her birth. The entity cannot be formed by a person of another religion, except for Sikhism and Jainism.
On a detailed note, the members of a HUF include a Karta, members, and coparceners. The Karta heads the family and is vested with the decision-making responsibilities. Any male member could play the role of a Karta with the consent of the family members.
A coparcener is a person who is entitled to his/her share of the property. A coparcener is classified into the following hierarchies:
- A first-degree coparcener could be a first-time holder of ancestral property.
- A second-degree coparcener includes the sons and daughters of the family.
- A third-degree coparcener includes the grandsons and granddaughters of the family.
- A fourth-degree coparcener includes the great grand-sons of the family.
The HUF wouldn’t cease to exist on the death of a sole male member. It would continue to function with the existing female members. However, a widower to a Karta cannot be considered as an heir to the throne. An adopted child is entitled to membership but cannot be a coparcener.
HUF Deed
HUF may be formed with or without a legal deed, though it is always advisable to pursue a business with a written document. With respect to a HUF, a legal deed consists of details pertaining to membership of the HUF, the source of funds, and the likes of it. The Deed acts as proof of the existence of the entity that has been formed.
The document should include a declaration by a family member with respect to the name of the Karta, powers vested with the Kartha, and the entitlement of the Kartha to hold the transactions on behalf of its members. In addition to it, the document should state the capital that was invested in forming the HUF.
PAN
Followed by the formation of a deed, the Karta is required to obtain a PAN Card, which is an important document for pursuing financial transactions. The application for PAN must be made in Form 49A, either online through the NSDL website or through manual means.
The PAN Card must be used by the entity for the filing of income tax returns and claiming applicable deductions. The application for PAN and income-tax return should consist of the signature of the Karta.
Separate Bank Account
As implicit as it might sound, it is mandatory for a HUF to function with a bank account, wherein the funds of the entity can be maintained. The bank account must be strictly maintained for business purposes, and shouldn’t include the savings of any member.
