1. WHAT IS HINDU UNDIVIDED FAMILY (HUF) BUSINESS? It is one of the oldest forms of business organisation found only in India. Business is owned and carried on by the members of the Hindu Undivided Family (HUF). It is governed by the Hindu Law. There are two conditions for existence of Joint Hindu Family Business: 1. Minimum two members must be there in the family. 2. Existence of some ancestral property. 2. WHAT ARE THE FEATURES OF A HUF? Membership: Membership of the Joint Hindu Family Business is automatic by birth. All members have equal ownership right over the ancestral property and they are known as ‘Co-parceners’. There are two systems which govern membership: Dayabhaga system – It prevails in West Bengal and allows both the male and female members to be co-parceners. Mitakashara system – It prevails all over India except West Bengal and allows only the male members to be co-parceners. There is no restriction on the number of co-parceners of the HUF business. However, only three successive generations can be members in the business. Formation: There should be at least two members and ancestral property to form a Joint Hindu Family Business. It is not created by an agreement between persons. Control: The business is controlled by the head of the family, who is the eldest member and is called ‘Karta’. He takes all the decisions to manage the business. Continuity: The business continues even after the death of the Karta as the next eldest member takes up the position of Karta. The business is stable. Minor Members: Since membership is by birth, minors can also be members of the business. 3. WHAT ARE THE ADVANTAGES OF HUF? 1. Ease of formation 2. Continuity of operations 4. WHAT ARE THE DISADVANTAGES OF HUF? 1. Confined to Joint Hindu families 2. Relatively limited capital 3. Limited managerial talents 4. Unlimited liability of the Karta 5. WHAT ARE THE STEPS INVOLVED IN CREATION OF HUF? 1) Capital and members – For an HUF to be created the major requirements is the capital and persons. Capital can be in the form of ancestral property, assets gifted by relatives and friends, or received by the HUF through a will. The minimum no. of members required is two who can be a husband and wife. Both the spouse can create a family and constitute a HUF. They don’t have to wait till they have a baby to constitute their HUF. 2) Select a suitable name – The HUF to be created should have proper name. Select a proper name for the HUF and the name should not violate the laws or have any negative impact. The members can choose a suitable name before starting a HUF business form. 3) Form a Deed – Formation of HUF should be embodied in a deed which provides that a proper legal deed or agreement is required before creating a HUF. The agreement/ deed should have all the details, including the name of Karta, co-parceners, address and source of funds in the corpus. Deed will facilitate that the business or the formation of HUF is valid and true. 4) Apply for PAN – Application for PAN (Permanent Account Number) is also an important step to be undertaken while forming a HUF. After executing the deed, the Karta is required to obtain a permanent account number PAN for the HUF. Obtaining PAN is a mandatory requirement as all financial transactions shall carry PAN. 5) Open a Bank Account – After PAN has been allotted, the Karta is required to open a Bank a/c in the name of the HUF. It is also advisable to get some stationery printed for official communication. The HUF is now ready to function. The Karta will have to invest in tax saving instruments and file tax returns on behalf of the HUF. Only the money related to the business of HUF shall be invested in such Bank accounts. Formation of HUF is no more a cumbersome process for any individual. Forming HUF can help you save taxes to an extent. 6. WHAT ARE THE TAX IMPLICATIONS ON HUF? Up to Rs. 2, 00,000 No Tax Rs. 2, 00,001 – 5, 00,000 10% Rs. 5, 00,001 – 10, 00,000 20% Above 10, 00,000 30% Educational Cess is Payable at 3% on Tax Calculated. Surcharge at 10% if total Income Exceeds Rs. 1 Crore.
Posted on: Tue, 03 Sep 2013 09:59:09 +0000