A complete guide on opening a Bank Account for HUF (Hindu Undivided Family)

Introduction

As people are all aware, the Income Tax Act treats Hindu Undivided Families as a separate legal entity. HUF is not permitted to conduct business under its own name using the bank accounts of its members (Karta and co-parceners). Since HUF is not a real person and cannot sign on its own behalf, a rubber stamp with Karta’s signature is required. This article focuses on opening a bank account for HUF.

What is an HUF?

The HUF stand for Hindu Undivided Family under Hindu Law and is made up of all living individuals who share a common ancestor, as well as the wives and daughters of those individuals.

According to a section of the Income-tax Act of 1961, for the assessment purposes under the Act, the Hindu Undivided Family is considered as a “person.” HUF is an independent tax-filing entity with its own Permanent Account Number (PAN). An HUF is made up of the “karta,” who is often the oldest person or family head, and the other family members.

The HUF’s daily operations are managed by the “karta.” Children are coparceners of their father’s HUF. When a daughter marries, she continues to be a coparcener in her father’s HUF while joining her husband’s HUF. Although Jain and Sikh families can create HUFs even if they are not governed to Hindu law.

Opening a bank account for an HUF

• HUF can open a bank account in a private or nationalized/public sector bank.
• There is no restriction on what type of bank account a HUF can open and operate. HUF can open either a savings account or a current account.
• HUF can also open a Demat account and a public provident fund account, etc.
• The HUF may establish a bank account after receiving the PAN Card.

 The required documentation to open a bank account for an HUF:

1. The name of the HUF;
2. A passport size photograph of the Karta;
3. Evidence of the Karta’s identity and address;
4. The HUF’s PAN card and PAN number;
5. The membership and coparcener list;
6. Any other information required by the bank at the time of account establishment.

Only individuals authorized by the Karta may manage the bank account, which will be registered in the names of HUF and the Karta. An HUF bank account is a current account, hence the bank will charge you more fees for it.

What are the benefits of creating an HUF?

An HUF is taxed independently from its members and co-owners since it is a separate legal entity. Therefore, the HUF can also claim the deductions and exemptions under Section 80, which reduces individual tax burden. The same goes for reimbursements for loans taken out, rent paid, and other expenses. Because of this, chartered accountants often advise all married Hindu couples to create a HUF. HUFs often pay 30% less tax than other taxpayers. HUFs can be created by Jain, Buddhist, and Sikh families as well as by Hindus. Hindu Undivided Families (HUFs) were originally recognized as a separate entity for taxation in 1917. And as a result, many families have came up with the relaxation from taxation over the years.

How to utilize the various tax advantages offered by HUFs?

1. Income tax advantages: From a legal perspective, a HUF is a separate group. In this case, each family member has a PAN Card, and the HUF has a separate PAN card. An HUF has the ability to manage its own business and generate revenue. It can also invest in mutual funds and shares. A basic tax exemption of Rs. 2.5 lakh is available to the HUF as it is a separate entity.
2. House ownership: Only one of your self-occupied properties can be recognized as such under current income tax regulations if you own multiple ones. The notional rent on the remaining properties is taxable and is “considered to be leased out.” However, an HUF is free of taxes if they own a home. Additionally, it may use a home loan to buy a residential property and claim for tax benefits under Section of the Income Tax Act.
3. Life Insurance: Individuals are permitted to claim tax benefits on some payments they make throughout the duration of a year under provisions of the Income Tax Act. An HUF is eligible for similar advantages.
4. Investments: Under a Section , a HUF is permitted to engage in tax-saving Fixed Deposits and Equity Linked Savings Schemes (ELSS) to receive tax benefits of up to Rs 1.5 lakh. Additionally, even though a HUF cannot create a PPF (Public Provident Fund) in its own name, it is nevertheless permitted to deduct taxes on the money transferred into each member’s PPF account on behalf of the HUF.
5. Medical Insurance: A Section allows you to deduct Rs 25,000 from the cost of your family’s health insurance payments each year. Due to the rise in health insurance premiums, this amount could not be enough if you wish to provide decent health insurance to your family. HUF can help you out in this situation. Health insurance premiums paid for family members of the HUF during the year are eligible for an additional tax credit of up to Rs 25,000. The maximum amount rises to Rs 50,000 for senior citizens.

Regular tax payment is important for being a law-abiding citizen. However, it doesn’t mean you can’t take advantage of the various tax breaks the government offers. You can maximize your long-term tax benefits by establishing a HUF.

FAQs

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

A family must have a minimum of 2 co-parceners in order to be considered as an HUF.

2. Are daughters permitted to join HUF?

Daughters are permitted to join HUF as coparceners. In 2005, the Hindu Succession Act, 1956, was amended to include the allowance of daughters.

3. If there are any states where the HUF is not accepted, which ones are they and why?

Kerala does not recognize HUF. The Kerala State Legislature abolished it in 1975 with the Joint Family System (Abolition) Act.

4. Is it possible for a Muslim family to qualify for HUF tax benefits?

Muslims cannot form HUF.  HUF can only be formed by Hindus, Sikhs, Jains and Buddhists.

5. Is a PPF Account permissible for a HUF?

No. It is not possible to open a Personal Provident Fund account under HUF’s name. HUF can make contributions to its members’ PPF accounts and receive tax benefits.

6. Am I allowed to open a trading account under the HUF name?

Yes, just like an individual trading account, HUF Karta can trade and invest in the stock, commodities, and currency markets. On the name of HUF, a trading and demat account may be opened. A HUF PAN Card and HUF Bank Account are required for HUF Trading and demat accounts.

7. Is it possible to deposit a cheque issued in favor of HUF member into a HUF account?

A check written on Karta’s name can be deposited into Karta’s HUF Bank Account. It is considered as the earning for HUF. It should be avoided because it might result in extra accounting and tax issues.

8. Is there a different brokerage fee for HUF Trading Accounts charged by the stock broker?

No. The HUF Trading Account’s brokerage is the same as that of a standard trading account.

9. Do HUFs need their own Aadhar Cards?

Each individual receives an Aadhar card. They do not apply to entities like company, Sole Proprietorships, HUFs, etc. In case of requirement, the HUF account must have Karta’s Aadhar Number connected. It’s a step in the KYC procedure.

10. Is the BSDA option available for HUF demat accounts?

No, BSDA (Basic Service Demat Account) is only allowed to be used with individual demat accounts (Excluding HUF accounts).