Meaning of HUF
A Hindu Undivided Family (‘HUF’) also known as a “Hindu Joint Family.” Under the Hindu law, the HUF (Hindu Undivided Family) plays a crucial role in the rights and division of ancestral property. Establishing, registering, or simply having a Hindu Undivided Family (HUF) in existence is a crucial and necessary step for initiating any proceedings related to ancestral property through the HUF. To operate and receive dividends or profits through a Hindu Undivided Family (HUF), it is necessary to have a bank account in the name of the HUF. To open a bank account in the name of a Hindu Undivided Family (HUF), it is mandatory to have a PAN card in the name of the HUF. Once the PAN card is issued, the HUF comes into existence for income tax purposes. People sometimes refer to the process of obtaining a PAN card for a HUF (Hindu Undivided Family) by different names, such as HUF registration, HUF creation, HUF setup, etc., but they all mean the same thing: applying for a PAN card and opening a bank account. There are two main reasons or benefits for the existence of a Hindu Undivided Family (HUF): the first is the division of and rights to ancestral property among family members, and the second is income tax savings. Since the Income Tax Department considers a Hindu Undivided Family (HUF) as a separate entity with its own PAN card, business profits, interest income from investments, capital gains, and rental income from property can be earned through an HUF. According to the Hindu law, a married Hindu man has the full right to form a Hindu Undivided Family (HUF), which means he can act as the Karta (head of the family) and obtain a PAN card and open a bank account for the HUF. After register a HUF in India, corpus creation in a HUF is a very important task, which we will discuss further.
Meaning of HUF deed
A HUF deed plays a crucial role in the establishment of a Hindu Undivided Family (HUF), primarily containing details of the family members and other necessary & lawful information A HUF deed can also be called a legal document.
Key points of HUF deed format
when creating a HUF deed format, the following points are included:
- Declaration of HUF
- Constitution of the HUF
- Source and Nature of HUF Property
- Corpus creation in a HUF
- Gifts to HUF
- Loans and Borrowings
- Business and Investments
- Powers of the Karta
- Date of Existence
- Binding Nature
Corpus creation in a HUF
Once a HUF (Hindu Undivided Family) bank account is opened, the question arises for the Karta (head of the family) and other members and coparceners of the HUF as to who can transfer money into the HUF account and what the nature of the transferred funds should be. There can be several reasons for transferring money to a HUF bank account, such as using the funds to start a business in the name of the HUF, making fixed deposits in the bank, buying and selling shares in the stock market, or investing in property, etc. The process of transferring funds to a HUF bank account is also called capital creation or corpus creation in a HUF. The most important question here is whether the funds transferred to the HUF account will be considered income of the HUF or if they will be tax-free for the HUF. It is also crucial to determine if the person transferring the funds will incur any tax liability.
Corpus creation in a HUF by receiving funds from three main sources:
1. Income from other sources
2. Gifts
3. Interest-free loans
1. Corpus creation in a HUF through Income from other sources:
A Hindu Undivided Family (HUF) can receive tax-free gifts of up to ₹50,000 in a year from a non-relative. If the amount received exceeds this limit, it will be considered as income of the HUF and taxed under the head “Income from Other Sources.” According to the new income tax slabs in Budget 2025, a Hindu Undivided Family (HUF) will not have to pay any tax on income up to ₹4 lakh in a financial year. Therefore, a HUF can receive up to 4 lakh rupees in tax-free funds as income in a year. An HUF is not eligible for a rebate under Section 87A of the Income Tax Act. If a Hindu Undivided Family (HUF) has income that falls under the purview of income tax in any financial year, then it is mandatory for the HUF to file an income tax return. Tax on HUF is calculated according to the income tax slabs.
2. Corpus creation in a HUF through gifts:
Corpus creation in a HUF through gifts is the most popular method among common people. A Hindu Undivided Family (HUF) can receive movable or immovable property, including money, securities, or other assets, as gifts from its members or relatives, as specified under Section 56(2)(x) of the Income-tax Act, 1961, and such receipts can become part of the HUF corpus. Gifts received by a Hindu Undivided Family (HUF) from its members or relatives are tax-free. However, it is important to note that when a Hindu Undivided Family (HUF) conducts business with money received as a gift, or earns interest by making fixed deposits, or generates profits by investing in the stock market, such income is not considered the separate income of the HUF. Instead, it is added to the income of the person who gave the gift, and that person is liable to pay tax on it. This rule falls under Section 64(2) of the Income Tax Act and is also known as the “clubbing of income.” There is no limit on the gifts that a HUF (Hindu Undivided Family) can receive from its relatives. The proper documentation of the process of giving gifts to a HUF (Hindu Undivided Family) by relatives is called a gift deed.
“Key features of drafting a gift deed for a HUF (Hindu Undivided Family)”
It is very important to keep these points in mind when preparing a gift deed for a HUF (Hindu Undivided Family);
- Date of creation: The date of creation of the HUF gift deed must be prior to the date of the transaction.
- Identity of donor: In a gift deed, the person or relative giving the gift is referred to as the “donor.” Based on the donor’s identification documents, all information such as the donor’s name, father’s name, address, PAN card number, and relationship with the HUF is provided.
- Identity of HUF: In the gift deed, the HUF (Hindu Undivided Family) is referred to as the “donee.” Based on the HUF’s PAN card and the HUF deed, all relevant information is provided, such as the HUF’s name, the Karta’s (head of the family) name, address, and the HUF’s PAN card number.
- Description of gift: Within the gift deed, the description of the gift is considered the most crucial detail, and complete information must be provided. This includes details such as the name of the gift (property, funds, equity, etc.), relevant documents, and bank transaction details (bank name, transaction reference number, date, amount, etc.).
- Voluntary consent: The donor must declare that he/she is giving this gift to the donee of his/her own free will and accord, in full possession of his/her faculties, without any coercion or undue influence, and as a result of his/her own independent decision. Furthermore, the ownership of this gift will belong to the HUF (Hindu Undivided Family) in the future. The HUF will be free to use it as it deems appropriate.
- Signature of donor & donee: The donor (relative) and the Karta (head of the family) on behalf of the HUF sign the gift deed.
- Presence of two witnesses: To further ensure the authenticity of the gift deed, two witnesses must be present and sign it.
- Government Fees: A gift deed is legally valid only if stamp duty has been paid and it has been registered at the nearest sub-registrar office.
To create a legal gift deed, you should seek the help of a lawyer or consultant who has complete knowledge of legal rules and regulations.
3. Corpus creation in a HUF through interest-free loans:
A HUF can obtain loans, just like an individual, either secured or unsecured. Secured loans are obtained through a bank or financial institution, while secured loans are obtained through a third party, and a family member or coparcener. This is the best way to corpus creation in a Hindu Undivided Family (HUF) as it helps in avoiding the provisions related to the clubbing of income. The main purpose of obtaining a HUF PAN card is to save on taxes, and this method is completely effective in achieving this goal. A Hindu Undivided Family (HUF) can use these interest-free loans to start its own business, and the profits generated will be considered the HUF’s separate income. The HUF can also invest these funds in a bank to earn interest, trade in the stock market to earn capital gains, or purchase property and earn rental income. The income generated from all these activities will be considered the HUF’s own income, for which the HUF can file an income tax return (ITR). The method of corpus creation in a HUF through interest-free loans must comply with legal regulations, which requires the creation of a “loan agreement” as a necessary procedure.
“Key features of drafting a interest free loan agreement for a HUF (Hindu Undivided Family)”
It is very important to keep these points in mind when preparing a interest-free loan agreement for a HUF (Hindu Undivided Family);
- Date & place of creation: The place and date of execution of the loan agreement are mentioned first, and this date should be prior to the transaction date for the loan amount.
- Identity of borrower: The person receiving the loan shall be called the “borrower,” which, unless inconsistent with the meaning or context, shall include their successors and permitted assigns. Here, the borrower will be referred to as the HUF, and the HUF’s name, address, and PAN will be provided, along with the name of the person authorized to sign on behalf of the HUF and their relationship to the HUF.
- Identity of lender: The person granting the loan shall be called the “lender,” and this term shall, unless the context or meaning otherwise requires, include his/her heirs, executors, administrators, and permitted assigns. Here, the lender’s name, father’s name, address, and PAN will be mentioned. If the lender is a relative of borrower (HUF), they must disclose their relationship.
- Borrower’s background: The activities of the HUF are included here, outlining the current business activities of the HUF.
- Reason of borrowing: The borrower (HUF) will provide a valid and reasonable reason for taking the loan.
- Loan amount: The amount of the loan being given to the borrower HUF will be mentioned here, even if it is not given in a lump sum but in instalments.
- Consent: When entering into an Agreement, it is important to confirm that the parties are entering into it with full consent and that all the terms and conditions of the Agreement have been accepted without any pressure. Furthermore, taking into account the mutual promises, terms, and conditions, both parties agree to the following.
- Interest-free loan: It will be fully confirmed that no interest will be charged on the loan amount.
- Loan Repayment: The time period is an essential part of the loan agreement, which includes when and how much the borrower will repay the loan so that the entire loan can be repaid within a specified time period.
- Loan, not a Gift: :The lender will confirm that the amount being offered is a loan, not a gift, to avoid future legal complications.
- Terms and Condition: No amendment, modification, or waiver of any provision of this Agreement shall be valid or binding unless made in writing and signed by the Borrower and the Lender.
- Legal law:Any agreement or contract entered into in India is made in accordance with the existing Constitution, and legal regulations of India. Any modifications to this Agreement shall be made in accordance with the applicable laws of India.
- Signature & witness: The lender and the borrower (HUF) will sign the agreement in the presence of two witnesses.
- Stamp duty: Stamp duty is an integral part of Indian revenue. A agreement is not considered valid until the stamp duty has been paid. This is followed by notarization and, if necessary, registration of the agreement.
A person with a thorough understanding of the legal requirements can assist you in drafting a loan agreement.
Friends, in this article we have explained the correct, and legal ways to build a corpus in a HUF. We hope this article will be helpful to you.