An HUF comes into existence automatically when a couple exchanges wedding vows. Apart from Hindus, Jains, Sikhs, and Buddhists are also permitted to form it. But if you want to use an HUF for tax purpose, there are simple formalities that have to be done. The family needs to execute a deed on a stamp paper declaring the formation of HUF. Get a permanent account number for an HUF and open a bank account. Apart from this, tax experts say that relatives need to gift some money to start the entity.
Individuals use an HUF in different ways. Some, for example, buy assets such as property under the name of the HUF, so that the family pays lower tax on the rental income. Some start a business under an HUF, so that the tax on business income can be lowered. Take an HUF, for example, which has a working husband and wife as members. They buy a property under the HUF instead of in their names. The couple will file its taxes separately. The rental income that the property earns will be under HUF, and the couple will file separate returns for the HUF. Just like the individual taxpayer, the HUF will also get all the I-T deductions such as those available under Section 80C. An HUF can also buy life insurance and health insurance for its members or invest in tax-saving funds and get a tax deduction.
HUF, however, has limitations when it doesn’t have an income of its own. If a member contributes to the HUF, the clubbing provisions of I-T will apply. It means any interest of income generated from the money that the member has put in the HUF will be taxed in the hand of the member. Similarly, transferring existing properties to an HUF would be pointless. Any income a transferred property earns will be taxed in the hands of the original owner unless the HUF pays the market price of the property to its member who owned it originally. In many cases, therefore, when a member wants to give funds to an HUF or vice versa, he prefers to loan the money instead of giving it as a gift.
Assets can’t be transferred/sold without the consent of all members
Tax officers can dispute loans to an HUF from its members and vice versa
Other countries don’t recognise HUF structure
Non-residents can face taxation problems if they are part of an HUF
Dissolving an HUF has procedural hassles