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All about HUF

All about HUF???

What is a HUF?

1.       HUF stands for Hindu Undivided Family or Joint Hindu family.  

2.       HUF is a family with husband, wife and children (and children’s spouses if any) living together. The property owned by this family will be through lineal ascendants or any ancestors.

3.       In India, there is a culture of Joint Families and there are many Incomes which arise to the Family as a whole and not to one specific Individual say for e.g. Rent. If Rent is received from a property which is jointly owned by all the Members of the Family, that Income will be taxed in the hands of the whole Family and not in the hands of one specific Individual.

Logic behind Forming an HUF to save Taxes

1. Basically the logic behind forming an HUF is to avail the benefit of an extra PAN Card legally. As the Income of the Family is not taxed in the hands of any specific Individual, a new PAN Card is allotted to the HUF and Tax would be paid by the Family using this PAN Card. 
2.  As a new PAN Card would be allotted to the whole family, it will also enjoy the benefits of Income Tax Slab Rates i.e. Income would be Tax Free up to the specified limits and would then be taxed progressively at 10%, 20% & 30%.

How to create HUF?

1. A false impression among people is that an HUF “needs to be created” where as an HUF comes into existence automatically at the time of marriage of an Individual.
2. No Formal Action is required to be taken at the time of marriage for creation of an HUF and only a creation deed is to be furnished on a Stamp Paper (optional). [Hence an unmarried man cannot form an HUF ;-) ] 
3. As HUF stands for Hindu Undivided Family, individuals belonging to other religions are not allowed to form HUF’s except Jain and Sikh who can create HUF even though they are not governed by the Hindu Law.

An HUF consists of

1.     Karta:

ü  Karta of a HUF is the senior most male member of the family and in financial terms he can also be called manager of the family.

ü  He takes all the decisions on the behalf of the family.

2.     Co-Parceners:

1. Coparcener is the person who has the right to demand the share of the property of family if  he/she wants to part away with the family with his/her share.
2. Not all members of the HUF are its coparceners. 
3. The co-parcenery extends to four degrees down the family hierarchy in the following manner

• 1st degree: Holder of ancestral property for the first time.
• 2nd degree: Sons and daughters
• 3rd degree: Grandsons.
• 4th degree: Great grandsons.

HUF can earn income from all sources like Income from Interest on Fixed Deposit, Capital Gains, Income from Business etc. except Income from Salaries

How to put funds in HUF?

There can be numerous ways, some popular ways are –

ü  One can receive gifts from members of bigger HUF’s, who though your relatives, aren’t members of your smaller HUF.

ü  Parents can also gift funds to an HUF via gift deed clearly specifying that gift is directed towards Son’s HUF and not towards the Son.

ü  Gifts can be accepted from strangers but only up to INR 50,000 (section 56, income tax act, 1961)

Benefits of forming an HUF

1.       HUF is eligible for deductions under section 80D (insurance premium paid on health of its members), 80G (donation), 80L (income from bank and post office deposits), 80C (assorted list of items) under Income Tax Act. 1961

2.       A HUF also enjoys exemptions under sections 54 and 54F in respect of capital gains.

3.       HUF also gets advantage of slab rate taxability.

4.       Also, under Wealth Tax Act, 1957 HUF is treated as a distinct entity and enjoys separate taxability.

5.       It can own property and also have its own business.

Documents required for opening HUF account:-

There are few documents that will be required for opening an HUF account.

1.       HUF will have a unique PAN card; this PAN card along with the PAN of Karta should be produced.

2.       A declaration form will be provided where every member has to make a signature stating the name of Karta and declare :

• They are the only members of HUF. 
• Karta to have sole authority over HUF account
• Every transaction on behalf of HUF account, made by each member of the family is governed by karta.

3.       Residential proof of Karta

4.       Identification proof of Karta

Apart from the points mentioned above there can be other documents or conditions depending on the bank where HUF account is opened.

Specific Tax Planning Tools for an HUF

1.       Create more assessable units by partition of HUF –

ü  The tax liability can be reduced by partition of the HUF. This can be easily done in a case where the partition results in separate independent taxable units.

2.       Remuneration to the Karta & members –

ü  pay remuneration to the Karta and its members for the services rendered by them to the family business. The remuneration so paid would be allowed as a deduction from the income of the HUF and thereby tax liability of the HUF would be reduced

3.       Making loans to members of HUF can be used an effective tool in tax planning. Loan can be made with or without interest.

4.       Providing gifts to members of HUF does not attract gift tax liability.

5.       Family Settlement / Arrangement – Family settlements / arrangements are also effective devices for the distribution of ancestral property. Since family arrangement does not involve transfer, it would not attract gift tax, capital gains tax or clubbing.

6.       As the cost of forming HUF is only a few thousand rupees and that too is a onetime cost, it is highly advisable for everyone to form an HUF and implement this technique.

Registration and Payment under Reverse Charge Concept

 

Subsequent to the introduction of sub-section (2) of section 68 under the Finance Act, 1994 (the Act), the central government has specified certain taxable services in respect of which a service recipient is required to pay service tax at the rate specified in section 66 of the Act. The concept of collection of service tax from the service recipients is generally called as Reverse Charge. Such a concept was in place even before the introduction of the negative list based taxation of services. However, in addition to concept of reverse charge, a new concept of Joint Charge has also been introduced w.e.f. July 1, 2012.

According to section 69 of the Act, the person who is liable to pay the service tax under reverse charge mechanism, will make an application for registration to the Superintendent. This post has shed light on some pertinent issues regarding registration and payment under reverse charge mechanism.

Whether the Service Receiver is required to provide description of services received under the head ‘description of services provided or to be provided by the applicant’ in Form ST-1?

According to section 69 of the Act, the person liable to pay service tax under reverse charge will file an application for registration in Form ST-1. As per Rule 4 (5A) of the Service Tax Rules, 1994, where the person registered as a service provider starts paying service tax under reverse charge, he will amend his registration certificate (Form ST-2) by making amendment in Form ST-1 online through aces website within a period of 30 days of such change.

In my opinion, the service receiver should mention the description of services received, under Reverse Charge in Form ST-1 mainly because of the following reasons:

 1. As per Section 68(2) of the Act, in case the service receiver is liable to pay service tax under reverse charge, all provisions of Chapter V will be applicable to such person as if he is the person liable for paying the service tax in relation to such service.

 In accordance with the clarification given in Circular No. 72/2/2004-ST, the service provider should indicate all the taxable services being provided by him while making an application for registration under service tax and Certificate of Registration (Form ST-2) should also indicate the details of all the taxable services provided by the service provider.

 2. Notification No. 01/2013-ST, dated 22-02-2013 has introduced the new Form ST-3 format for filing return for the period July 1 to Sept 30, 2012. As per the general instructions given for filling the Form ST-3,

 “If there is a change in the address or any other information as provided by the assessee in Form ST-1 or as contained in Form ST-2, the assessee should file   amendment application online in ACES for getting the amended ST-2. If the assessee has provided / received any additional service for which he is not registered, he has to first file the  amendment application through Form ST-1 and after the approval of the same by the  departmental  officer, he should file the return”.

Earlier, the above highlighted text was not included in the general instructions for filling the Form ST-3.

3. Suppose, the assessee is paying service tax under reverse charge and is therefore required to get registered under section 69 of the Act. While making an online application for registration in Form ST-1, past selecting ‘the service recipient option’ under Category of Registrant head and filling the other mandatory fields, in case he doesn’t select the description of taxable services received and tries to move to the next page, he will get an error message “Please search and select at least one taxable service offered” and thus will not be able to complete the registration process.

However it’s not feasible to make distinction between the services received and provided by the assessee, given the existing format of Form ST-1. The service receiver should select the description of services he is receiving or expected to receive in near future while applying for registration/amendment in Form ST-1. The description of services eventually becomes apparent to the department on filing the return by the assessee.

Under which accounting code, the service tax will be deposited in reverse charge? Will it be deposited in the code under which the assesse is registered as a service provider or code of the services received?

The assessee cannot pay reverse charge under the accounting code in which he is registered as a service provider. The service tax is always paid under the accounting code of the service under which description of received/provided service falls.    

ISCA - CA Final - May 2013 - Probable questions

Important questions for May 2013

Chapter 1 :

1.       Office automation systems classification of IS are less important. Remaining all imp. 

Chapter 2:

1.       6 Approaches followed for s/w development + Strength & weakness (Agile approach most imp – (A.  Jolie ;-)

2.       SDLC Phase 1 – Feasibility Study & its types .

3.       SDLC Phase 2 – Fact finding technique + Analysis of Present system ( Most imp) + SRS + Roles involved in SDLC

4.       SDLC Phase 3  - Designing System Output + Input + 4 Design Principles

5.       SDLC Phase 4  - 5 Methods of Validating Vendors Proposal

6.       SDLC Phase 5 – Whole Phase is most imp. ( Most likely to get a question from this phase – Regression Testing )

7.       SDLC Phase 6 : Conversion Procedure + Strategies

8.       SDLC Phase 7 : PIR + Maintenance & its types . 

Chapter 3:

1.       General concepts – Mt Pg. 99 to 116 ( Most imp – IS Audit questions )

2.       What is Audit Trial + Objectives ( Mt. Pg. 129)

3.       Controls – Compensatory control (Pg 120) + User Controls

4.       Data Security questions ( Cryptosystems + DES + PKI + Firewall & its types + IDS + Hacker & how do hackers hack + Virus …….) 

Chapter 4:

1.       Multiyear Testing plan

2.       Audit tools  ( Most imp)

3.       Advantages + Disadvantages of Continuous audit

4.       Hardware Review + LAN Review.

Chapter 5 :

1.       Definitions ( Risk + Vulnerability + Threat …….)

2.       Risk Management cycle

3.       Areas to be focussed in Risk Management

4.       5 Different ways to evaluate risk

5.       Risk Mitigation techniques + Measures

6.       4 strategies for Risk Management ( Pg. 89)

7.       Threats – computerised environment

Chapter 6 : ( Generally whole chapter is imp)

1.       BCP + Components

2.       Objectives + BC life cycle

3.       BPR + Business Modelling

4.       BIA ( 3^rd  phase of BCP)

5.       Different types of Plans  ( Emergency + Backup + Test plan)

6.       SPF + Causes + Significance

7.       Threats & Risk Mangt.

8.       Backup Techniques

9.       5 factors to be considered by deciding type of storage media.

10.    Different types of Insurance ( Most imp)

Chapter 7: ERP -  Advise to study complete chapter 

Chapter 8 :  

1.       Sys & Web trust + SAS-70 + HIPPA + COCO+ CMM + COBIT

Chapter 9 : Advise to study complete chapter 

Chapter 10 : 

1.       Objectives of the act + Scope + Non applicability of the act .

2.       Section 3 to 43 .  ( Most imp : 3 , 4, 5,6,7,8,9, 11, 12, 13, 17,18 ,  22 , 23, 25 , 26 , 30 , 33 , 35 , 36, 37, 38 , 41 , 43 )

3.       Compounding ( section 63 read along with Section 77A)

4.       Section 87 – Powers of CG

 Note : These are just a probable questions . 

Page numbers referred above are from the book ISCA - Made easy ( Edition 2 ) by Praveen Jain  .