Hindu Undivided Family (HUF) – Meaning, Benefits & How It Helps Reduce Tax

💡 Introduction

A Hindu Undivided Family (HUF) is one of the most effective and legitimate ways to save taxes under Indian income tax law. Not only Hindu families, but also Buddhist, Jain, and Sikh families can form an HUF.

Under the Income Tax Act, an HUF is treated as a separate person — it can own property, earn income, and claim deductions such as Section 80C, 80D, and capital gains exemptions. This separation allows families to legally split income and reduce overall tax liability.

⚖️ Key Highlights

• HUF is a separate legal entity for income tax purposes.
• Income can be divided between individual members and the HUF, reducing total tax.
• Basic exemption limit: ₹2.5 lakh (old regime) and ₹4 lakh (new regime for FY 2025-26).
• Headed by a Karta, usually the senior-most family member.

🏠 What is an HUF?

A Hindu Undivided Family (HUF) is a family unit recognized under the Income Tax Act. It includes a common ancestor and all his lineal descendants, along with their spouses and unmarried daughters.

The Karta is the head of the HUF and manages its affairs, while other members are called coparceners. The HUF can hold assets, earn income, and invest independently from its members, helping reduce taxes through income splitting.

👨‍👩‍👧 Members of an HUF

• Karta: Senior-most member managing all affairs, with unlimited liability.
• Coparceners: Lineal descendants (including daughters) who have equal rights in HUF property and can demand partition.
• Other Members: Wives of coparceners become members after marriage but cannot demand partition.

Only coparceners can seek partition, while the Karta holds full control and bears tax responsibility.

🌍 HUF Residential Status

The residential status of an HUF depends on where its control and management are situated.

• Resident HUF: Controlled and managed wholly or partly from India.
  • If the Karta is resident and ordinarily resident, the HUF is treated the same.
  • If the Karta is resident but not ordinarily resident, the HUF is considered resident but not ordinarily resident.
• Non-Resident HUF: Entire control and management are outside India.

In short: The residential status of an HUF generally follows that of the Karta.

💰 HUF Tax Slabs

The tax slabs for HUFs are identical to those applicable to individuals under both regimes.

🔸 New Tax Regime (FY 2025-26)

🔸 New Tax Regime (FY 2024-25)

🔸 Old Tax Regime

Note:

• Senior citizen slabs are not applicable to HUFs.
• Surcharge and cess apply as per standard provisions.

🚫 Rebate under Section 87A

A common misconception is that HUFs can claim a rebate under Section 87A if income is below ₹12 lakh (FY 2025-26) under the new regime or ₹5 lakh under the old regime.

However, this is incorrect — the rebate under Section 87A is available only to resident individuals, not to HUFs.

🧾 HUF Tax Benefits

Although the 87A rebate is unavailable, HUFs enjoy several significant tax benefits:

• Section 80C: Up to ₹1.5 lakh deduction for investments in PPF, ELSS, life insurance, etc.
• Section 80D: Deduction for health insurance premiums paid for HUF members.
• Section 80G: Deduction for eligible donations.
• Home Loan: Deduction for interest paid on housing loan.
• Capital Gains: Exemptions under Sections 54, 54F, and 54EC on reinvested long-term capital gains.

Since HUFs are separate taxable entities, they can independently claim these deductions, resulting in substantial tax savings for the family as a whole.

💡 Example: How HUF Helps Save Tax

Case Study:

• Mr. Rajesh Chopra forms an HUF with his wife, son, and daughter.
• He transfers his property earning ₹15 lakh annual rent to the HUF.
• His personal salary income is ₹20 lakh.

✅ Result: By forming an HUF, Mr. Chopra saved ₹2.52 lakh in taxes through legitimate income segregation.

🏗️ How to Create an HUF

Forming an HUF is simple and legal.

Steps:

1. Draft an HUF Deed declaring formation and members.
2. Apply for a PAN card in the HUF’s name.
3. Open a bank account for the HUF.
4. Transfer family assets or property to the HUF.

📌 Note: An HUF cannot be formed by a single individual — it requires at least two family members.

⚖️ Advantages of Forming an HUF

• Separate PAN and independent tax filing.
• Income splitting between family and HUF.
• Succession and estate planning benefits.

⚠️ Disadvantages of HUF

• Possible partition disputes among members.
• Complex compliance and documentation.
• HUF cannot receive salary income.

🔚 Dissolution of an HUF

An HUF can be dissolved through partition, where assets are distributed among coparceners:

• Total Partition: All assets divided; HUF ceases to exist.
• Partial Partition: Only selected assets divided; HUF continues for others.

A partition deed must be properly executed, stamped, and registered, and the HUF’s PAN surrendered to complete the process.

🧭 Conclusion

An HUF is an excellent tool for legitimate tax planning and family wealth management. When used properly, it can help families optimize tax liability, manage inheritance, and structure income effectively.

For guidance on forming or managing an HUF, connect with the experts at Indian Tax Planning (ITP).