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HUF Account Basics Explained (Bank, Demat and Trading Account)

Published on Thursday, December 6, 2018 by Chittorgarh.com Team | Modified on Wednesday, February 27, 2019

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HUF Account Basics Explained (Bank, Demat and Trading Account)

HUF (Hindu Undivided Family) is designed for undivided Hindu families who earn their income jointly rather than an individual. Since the income of these families is joint income, it's not easy to divide it among the family members for tax purposes. HUF helps to manage that.

HUF is a separate entity that can be formed by the members of a Hindu family which includes a common ancestor and all his lineal male descendants and their wives and unmarried daughters. They are called coparcener. Other distant relative e.g. brother-in-law, sister-in-law etc. can also be deemed member of HUF. The deemed members cannot demand the partition of HUF.

Coparcener is a person who shares equally with others in the inheritance of an undivided estate or in the rights to it.

At least 2 family members have to join to form a HUF. HUF cannot be transferred or sold or break into parts without the consent of all coparcener.

The Income Tax Act and Wealth Tax Act treat the HUF as an independent body for the purpose of investment and taxation. HUF has a separate PAN card and a bank account. A separate tax return has to be filed for the HUF. The HUF enjoy all deductions and exemptions under the Income Tax Act free from the income and tax liabilities of its members.

HUF account can be formed by the Hindus and Hindu dissenters including Brahmo Samajist, Arya Samajist, Virashaiva, Lingayat, Prarthna Samajist, Jains, Sikhs, and Buddhist families. Muslim or Christian families cannot form the HUF.

Note that the HUF is not a recognized entity in Kerala state. The Kerala State Legislature abolished HUF laws by The Joint Family System Act, 1975.


Karta of HUF

The Karta is the manager of the HUF. He takes care of day-to-day activates of HUF. He is the authorized signatory and the face of the HUF in all the dealings.

Who can be Karta of a HUF?

  • By default, the head of the family (senior most male coparcenerof the family)
  • Junior coparcenercan be a Karta of HUF with the consent of all the coparcener.
  • The only coparcener can become the Karta. Deemed members cannot be Karta.
  • There can be more than one Karta of a HUF.
  • The elder minor son could act as the Karta in the absence of any other senior person.
  • A woman can be a Karta of HUF after the demise of the male head in three situations.
    When the sons are minors and she acts as their guardian.
    2. When the male members are not in a position to act as Karta and have given her permission to manage the family affairs.
    3. When there are no male members in the family.

What are Karta powers in HUF?

  • Managing the daily affairs of HUF.
  • Custodian of the finances.
  • Karta can borrow money for & on behalf of HUF.
  • Spend the money for the family.
  • Karta is not liable to submit the account to anybody.
  • Can make partition of the family.
  • HUF cannot enter into contracts, or form partnership firm, or represent except through Karta, however, Karta may allow others to represent HUF.

Death of Karta in HUF

As HUF Karta is the manager of a HUF, the death of the Karta is a major event for HUF.

The HUF's PAN Card, Bank Account, Demat Account, Trading Account, Properties etc. are directly linked to Karta's identity. He is the face of the HUF. His address, phone number (for OTP) and signature are on all the accounts and assets held under HUF. Technically, his KYC (Know your customer) detail is linked to all the HUF accounts.

In case of death of Karta, following things has to be done to make another person as the Karta of HUF:

  1. HUF Formation Deed - Revised deed has to be prepared on the ₹100 stamp paper. The format of the deed is provided below. This one-page agreement letter authorizes the new Karta to handle HUF day to day activities.
  2. HUF PAN Card - In this case, the HUF name (despite having the name of the Karta who died) and the PAN Number remain same. The personal information of the Karta has to be updated on the PAN Card. Without updating this, you may not be able to file the taxes for HUF.
  3. HUF Bank Account - This is the simplest change as only the authorized signatory needs to be updated on the HUF bank account. Unlike assets (i.e. property, demat holding), the bank account has a feature of 'one or more signatory' on an account. This makes it easy.
  4. HUF Demat Account - A new HUF demat account has to be opened with the new Karta's KYC. The holdings in the old demat account are transferred to the new demat account without any tax implications.
  5. HUF Trading Account - A new trading account has to be opened with the KYC information of the new Karta.
  6. HUF Properties and other Assets - The assets under HUF has to be transferred to the new Karta.

HUF Advantages (Benefits of HUF)

Despite accounting and managing hassles, there are tons of advantages of a HUF account.

  • HUF can be formed to save taxes by an extra PAN card in the name of the family, legally.
  • HUF helps with jointly owned or inherited property. You can purchase, sell, rent and lease the HUF owned property.
  • The income from assets under HUF goes to the HUF. This reduces the tax liability of the family members who otherwise have to take the income in their personal accounts.
  • Tax slabs of HUF are same as an individual. HUF qualify for all the tax benefits under Section 80C, 80D, 80G, 80L and so on.
  • HUF also has exemptions under Section 54 and 54F with respect to capital gains.
  • The HUF is entitled to claim a deduction for interest on self-occupied house property of ₹2 lakhs in a year as per section 24 of the Income-tax Act.
  • A HUF demat and trading account can be used for IPO, Buyback etc.
  • Stock market investments can be done in the name of the family.

Disadvantages of HUF

  • All the assets in the name of HUF are assets of the family and not of a specific individual. All the members of the family have the equal right on the assets of the HUF.
  • An addition return has to be filed for HUF.
  • HUF act does not include other religions in its definitions except Hindu and Hindu dissidents (including Sikh, Jain, Buddhist). The families from other religion i.e. Muslim, Christian, Jewish cannot open a HUF.
  • HUF is now allowed to open PPF (Public Provident Fund) account. HUF can make a contribution to members PPF account to get tax benefits.
  • In the case of the death of Karta in HUF, a major change has to be done across the board as Karta's personal identity is linked to the HUF. Read the above section 'Death of Karta in HUF' for more detail.

HUF Account Tax Benefits Example

A Hindu Individual can open a HUF as soon as he gets married and when the child is born, he will automatically become a member of his father's HUF. Under the Income Tax Act, HUF is treated as a separate entity. This allows members of the HUF to save taxes by dividing their income. Let's understand that with an example.

Scenario 1 - Tax without HUF

Mr. Mahesh has an income of ₹20 lakh and he earns ₹10 lakhs from other business. He pays Life Insurance premium of ₹60,000 and PPF of ₹1,00,000. He also pays a medical insurance premium of ₹20,000.

Gross Taxable Income

30,00,000

20,00,000+10,00,000

Deductions under 80C

1,50,000

PF + PPF

Deduction under 80D

20,000

Medical Insurance

Net Taxable Income

28,30,000

Total Tax Liability

6,81,345

Tax calculation

Up to ₹2,50,000

Exempt from tax

0

₹2,50,000 to ₹5,00,000

5%

12,500

₹5,00,000 to ₹10,00,000

20%

1,00,000

More than ₹10,00,000

30%

5,49,000

Total Tax without Cess

6,61,500

Cess

3% of total tax

19,845

Total Tax Liability

6,81,345

Scenario 2 - Tax Benefits with HUF

Let's assume that Mr. Mahesh is legally shifting his additional income of ₹10 lakhs to his HUF. He also pays Life Insurance premium of ₹60,000 and PPF of ₹1,00,000 in his name from his HUF. The additional income is also eligible for tax benefits under Section 80 C. Now we calculate tax in this scenario:

Tax on personal account

Gross Taxable Income

20,00,000

Deductions under 80C

1,50,000

PF + PPF

Deduction under 80D

20,000

Medical Insurance

Net Taxable Income

18,30,000

Total Tax Liability

3,72,345

Tax calculation on personal account

Up to ₹2,50,000

Exempt from tax

0

₹2,50,000 to ₹5,00,000

5%

12,500

₹5,00,000 to ₹10,00,000

20%

1,00,000

More than ₹10,00,000

30%

2,49,000

Total Tax without Cess

3,61,500

Cess

3% of total tax

10,845

Total Tax Liability

3,72,345

Tax on HUF Account

Gross Income

10,00,000

Deduction under 80C

1,50,000

Net Taxable Income

8,50,000

Total Tax Liability

84,975

Tax calculation on HUF Account

Up to ₹2,50,000

Exempt from tax

0

₹2,50,000 to ₹5,00,000

5%

12,500

₹5,00,000 to ₹10,00,000

20% of 3,50,000

70,000

More than ₹10,00,000

30%

Nil

Total Tax without Cess

82,500

Cess

3% of total tax

2,475

Total Tax Liability

84,975

In 1st scenario (without HUF) he paid ₹6.81 Lakh on total gross income of ₹30 Lakh.

In 2nd scenario (with HUF) he paid ₹4.57 Lakh (3,72,345 + 84,975) on same total gross income of ₹30 Lakh.

By using HUF account Mr. Mahesh saves ₹2.24 Lakh of taxes in a year. This is a saving of over 30% in tax paid.

With little account overhead, Mr. Mahesh is able to save quite a bit of tax.


HUF Formation Process (Step by step guide)

Are you ready to open HUF Account to reap the tax benefits? Simply follow the steps below to form a HUF:

Step 1 -Declaration of Creation of HUF

Firstly, form a Deed on a Stamp Paper mentioning names of Karta and Coparcener. The Deed acts as the proof of the existence of the entity that has been formed. It is not required but it helps in case of disputes.

It's a very simple process to form a deed for HUF. It requires a one-page letter on a stamp paper signed by the Karta and the Coparceners.

Buy a ₹100 stamp paper and print the below HUF Creation Deed. Get it signed by all the members of the HUF and 2 witnesses. That's it.

Though it's not required, if you or the family members wish to register this agreement, you could do that by visiting your nearest registrar.

Note: It is a document which represents the understating between the members. You could also add more information to it (i.e. limiting the power of Karta) or consult a local attorney for more specific clause you would like to add to it.

HUF Formation Deed Sample Document (Print on stamp paper)

Download HUF Deed Document in MS Word Format

DECLARATION

I, ________________ son of __________________ residing at ______________________ aged ___Adult do hereby declare-

  1. That I am Karta of ___________________________________________ .
  2. That I received on behalf of the H U F gift of Rs. ___________ by way of CASH/CHEAUE from my FATHER/MOTHER ___________________________(name of relative of karta of HUF) on dt. _______________ this formed the corpus of the HUF.
  3. That the HUF at present is consisting of the followings members
    1. Shri _____________________, Adult, Residing at _________________
    2. _____________________, Adult, Residing at _________________
    3. Kumari _________________-Minor, Residing at ___________________
  4. That the above statements are true to the best of my knowledge & belief. Declare this on ______Day ________of _______

For __________________ HUF

KARTA

WITNESS:

  1. __________________- (_____________________)
  2. __________________- (_____________________)

Step 2 - HUF PAN Card

Following the formation of a deed, you have to get a PAN Card on the name of HUF.

The HUF is a separate entity like a company or partnership firm. It is mandatory by the law in India to get a PAN card for HUF. The Karta has to apply for HUF PAN using Form 49A. The application can be made online as well as offline.

The name on the PAN card is mentioned as '[Karta Full Name] HUF' i.e. Sanjeev Singh HUF. The application for PAN card has information and signature of the Karta.

Documents required for HUF PAN Card Application

  1. Proof of Identity of Karta
  2. Proof of Address - Copy of Karta's Aadhaar card, Karta's Voter ID, Karta's driver's license or passport
  3. Proof of Date of Birth of Karta
  4. HUF Formation Deed

If all the documents are in order, the PAN card would arrive in around 21 days after submission.

Step 3 - HUF Bank Account

Once you get the HUF PAN Card, the next step is to open a HUF Bank Account. It is mandatory to open a separate bank account on the name of HUF. This bank account must be strictly maintained for HUF purposes, and shouldn't include the savings of any member as the assets in HUF account are equally owned by all the members.

Features of HUF Account

  1. The HUF account is opened in the name of the Karta.
  2. The Karta of the family handles the bank account.
  3. Every member of the family can deposit their income in this common corpus account.
  4. HUF bank account is similar to the personal saving bank account. This account has its own debit card, cheque book and internet banking. It is operated by the Karta. Karta's signature is required for every transaction from the bank.
  5. HUF account can be opened in any bank.
  6. HUF account can only be opened by the Hindu and Hindu dissidents like Sikh, Jain and Buddhist.
  7. HUF can be divided only on agreement of every coparcener of the family.
  8. The family gets tax benefits on deposits under various sections.

Documents required for HUF Bank Account

List of documents required to open a HUF account:

  1. HUF PAN card
  2. Residential proof of Karta (Aadhar card, Passport)
  3. Identification proof of Karta (Aadhar card, Passport, PAN card)
  4. A declaration form (provided by the bank) where every member of HUF declares:
  • They are the only members of HUF.
  • Karta is to have complete authority over HUF account
  • Every transaction on behalf of HUF account, made by each member of the family is governed by the Karta

Step 4 - HUF Demat & HUF Trading Account

A HUF Demat Account and the HUF Trading Account are required for investments in the stock market, Mutual Funds and to manage securities of the family. Similar to HUF Bank Account, these two accounts are opened and managed by the Karta of HUF of behalf of the members of HUF.

HUF Demat and Trading accounts can be opened with any stock broker in India.

Benefits of HUF Demat Account

  • Investing in the name of the family.
  • Tax benefits as HUF is considered as a separate entity. For example, say both the husband and wife already have taxable income, then they can create HUF and earn an additional ₹2.5 lakh tax-free income.
  • Increase chance of allotment in IPO as you have 1 extra account to apply for IPO shares.
  • Increased benefits in buyback offer where HUF falls under the retail reserve quota.

List of documents required to open a trading/demat account

To open HUF Demat and trading account, Karta of HUF has to provide his documents and sing it on the forms. The following documents are required:

  1. Pan card of HUF
  2. Pan card of Karta
  3. Address Proof of HUF (i.e. Bank Account Statement)
  4. Address Proof of Karta - AADHAR Card, Passport, Driving License, Telephone bills, Electricity bills, Bank Statement
  5. Karta's photograph.
  6. Karta's declaration giving details of family members of the HUF (names, sex (male, female), DOB, signatures and relationship with Karta)
  7. Bank Passbook/Statement of HUF Indicating its existence.

FAQ's

  1. What is the minimum number of co-parceners required to form a HUF?

    There should be minimum 2 co-parcener's in a family for that entity to be treated as a HUF.

    Discuss this question

  2. Can daughters be a member of HUF?

    Yes, daughters can be part of HUF as coparceners.

    Note that daughters were allowed after the amendment of the Hindu Succession Act, 1956 in the year 2005.

    Discuss this question

  3. What happens to demat account of HUF on the death of Karta?

    The death of the Karta requires major changes in the way HUF operates as Karta's personal identity is attached to all the accounts and assets held by HUF. The detail of this is provided in 'Death of Karta in HUF' section above.

    Discuss this question

  4. Are there any states in which the HUF is not recognized and which are they if any?

    HUF is not recognized in Kerala. It was abolished by The Joint Family System (Abolition) Act, 1975, by the Kerala State Legislature.

    Discuss this question

  5. Can a Muslim family claim income tax benefits as a HUF?

    No, Muslim families cannot form HUF. Only Hindu and Hindu dissidents can form HUF.

    Discuss this question

  6. Can a HUF have a PPF Account?

    No. A Personal Provident Fund account cannot be opened on the name of HUF. Through HUF can contribute to the PPF account of its members and get the tax benefits.

    Discuss this question

  7. Can I have Trading Account in the name of HUF?

    Yes, HUF Karta can trade and invest in stock, commodity and currency markets similar to individual trading account. A trading and a demat account can be opened on the name of HUF.

    For HUF Trading and Demat account, a HUF PAN Card and HUF Bank Account is mandatory.

    Discuss this question

  8. Can a cheque issued in favor of a member of HUF be deposited into a HUF account?

    A cheque issued on Karta's name can be deposited into Karta's HUF Bank Account. It is considered the earning for HUF.

    It should be avoided as it could add unwanted accounting and tax hassles. For example; what if the TDS is dedicated on the payment made to Karta through check.

    Note that cheques from the members of the HUF can be deposited in the HUF account without any problem.

    Discuss this question

  9. Does stock broker charge a different brokerage Fee on HUF Trading Account?

    No. The brokerage of HUF Trading Account is same as the brokerage of an individual trading account.

    Discuss this question

  10. Does HUF require a separate Aadhar Card?

    Aadhar cards are given to individual persons. They are not applicable to entities like companies, proprietorships, HUF s etc.

    Note that if needed, Karta's Aadhar Number has to be attached with the HUF account. It is a part of the KYC process.

    Discuss this question

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