Smart Ways to Reduce Income Tax: Hindu Undivided Family (HUF)

Understanding ways to reduce your income tax liability holds great importance, particularly due to India’s evolving tax rules. One option that often attracts attention for its potential advantages is the Hindu Undivided Family (HUF). By forming an HUF, you and eligible family members can combine assets, file a separate tax return, and claim deductions independently, thereby lowering the overall tax paid by the family. 

This article explores tax benefits for HUF, how to save income tax through an HUF, drawing on the latest rules and updates.

What Is HUF and Who Can Form It?

A Hindu Undivided Family (HUF) represents a distinctive legal and tax entity under Indian law. It comprises descendants of a common ancestor, including spouses, and is recognised as a separate “person” for income tax purposes. Consequently, the HUF obtains its own Permanent Account Number (PAN) and must file tax returns separately from its individual members. As a result, you have an additional taxpayer in your family, which can be beneficial if managed properly.

Eligibility Criteria

• Religion and Community: An HUF can be formed only if the family follows Hindu, Sikh, Jain, or Buddhist faiths.
• Family Structure: It arises automatically at the time of marriage; the husband, wife, and their children constitute the basic HUF unit. Extended coparceners (e.g. siblings, grandchildren) may join when assets or lineage permit.
• Minimum Members: There must be at least two members to form an HUF. You cannot create an HUF alone.
• Karta and Coparceners: The eldest member (traditionally male, though female Karta is now lawful) acts as the Karta and manages HUF affairs. Coparceners include those born into the family with a right to demand partition. Members by marriage (e.g. daughters-in-law) are part of the HUF but not coparceners until, in some rulings, daughters gain equal rights by birth.

Formation Steps

1. Legal Deed: Draft a deed on non-judicial stamp paper detailing the structure, members, Karta, coparceners and nature of assets or business. All initial members must sign it.
2. Obtain PAN: Apply for a new PAN in the HUF’s name.
3. Bank Account: Open a dedicated bank account in the HUF’s name for receipts and payments.
4. Asset Pooling: Transfer ancestral property or gift assets (up to permissible limits) into the HUF.
5. Account Maintenance: Maintain separate books for HUF income and expenditure, distinct from individual books.

How to Save Tax by Splitting Family Income

Since the HUF is taxed separately, income originally accruing collectively can shift to the HUF, thereby utilising multiple basic exemptions and slab benefits.

Multiple Basic Exemptions

Under the old tax regime, the basic exemption limit for an HUF remains ₹ 2.5 lakh for FY 2024-25. Under the new tax regime, with recent amendments to tax slabs, and increase in the rebate, the tax-free income for individuals has expanded up to ₹12 lakh in some cases. and similar relief may apply to HUFs (given that HUFs follow slab rates akin to individuals). By allocating taxable income between you and the HUF, you can avail of two basic exemption slabs instead of one, effectively doubling the non-taxable limit, subject to the HUF earning sufficient income.

Transferring Income-Producing Assets

• Ancestral Property: If ancestral property transfers to the HUF, rental income becomes HUF income. Ensure proper documentation to reflect that the asset now belongs to the HUF.
• Interest or Dividends: Funds transferred to the HUF bank account can generate interest income, taxed separately in the HUF’s return.
• Business Income: If a family business runs under the HUF’s banner, profits accrue to the HUF, enabling splitting from individual incomes. However, comply with transfer-pricing and genuineness tests to avoid scrutiny.

Leverage HUF for Availing Additional Deductions

Beyond basic exemptions, HUFs can claim deductions under various sections of Chapter VI-A, akin to individuals. Strategic investments and expenses through the HUF can increase tax savings.

Section 80C Deductions

An HUF may claim deductions up to ₹ 1.5 lakh under Section 80C by investing in approved instruments:

• National Savings Certificates (NSC)
• Public Provident Fund (PPF)
• Equity Linked Savings Scheme (ELSS)
• Sukanya Samriddhi Yojana (SSY) contributions for girl child accounts held by members.
• Tax-saving Fixed Deposits (5-year lock-in)
• Life Insurance Premiums for HUF members
• Home Loan Principal Repayments if an HUF is a co-borrower or co-owns a property.
• Tuition Fees for HUF members up to specified limits.
• Pension Plans and ULIPs: Premiums paid by HUF for its members’ benefit.

Section 80D for Health Insurance

The HUF can secure health insurance for its members (self, spouse, dependent children). Deductions allowed:

• Up to ₹ 25,000 if members are below 60;
• Up to ₹50,000 if members include senior citizens.
  You may purchase a group health insurance policy under the HUF’s name, covering members, and claim the premium paid as deduction in the HUF return. 

Section 80G for Donations

Donations by the HUF to eligible charities attract deductions:

• 50% or 100% deduction depending on institution category;
• Qualifying receipts and registration numbers must be retained.
  If your HUF donates ₹1 lakh to an approved trust offering 50% deduction, you may claim ₹50,000 deduction in the HUF ITR. 

Capital Gains Exemptions on Property

• Section 54: Exemption on long-term capital gains from sale of residential property when reinvested in another residential property.
• Section 54F: Exemption on long-term gains from sale of any long-term asset if proceeds are invested in residential property.
  If the HUF sells property with long-term gains and reinvests within the stipulated period, gains may be fully or partially exempt. Document timelines and costs meticulously.

LTCG Exemption on Equity Investments

From FY 2024-25, the exemption limit for long-term capital gains on equity-oriented assets has increased to ₹1.25 lakh per financial year, with tax on gains beyond that taxed at 12.5%. If both you and the HUF hold separate demat accounts, each enjoys this exemption independently:

• You report gains up to ₹1.25 lakh; HUF also reports its own up to ₹1.25 lakh.
• Combined, the family can claim ₹2.5 lakh exemption, before the 12.5% levy on excess.
  This can yield material savings if you split investments between you and the HUF. Ensure compliance regarding share transfers and genuine funding sources.

Home Loan Benefits

When an HUF jointly borrows for and holds a residential property:

• Principal Repayment: The HUF may claim a deduction up to ₹1.5 lakh under Section 80C in its ITR; if you are also a co-borrower, you may claim your share of the principal repayment in your personal return.
• Interest Payment: Under Section 24(b), the HUF can deduct interest on the home loan up to ₹ 2 lakh in its return, provided the property is self-occupied; similarly, as a co-borrower, you may claim your portion of the interest deduction in your own ITR.

Thus, combined deductions across HUF and an individual may total up to ₹3.5 lakh (₹1.5 lakh principal plus ₹2 lakh interest on home loan) per annum if structured correctly. Documentary evidence of loan agreement, ownership deeds, and KYC compliance is essential.

Tips to Handle HUF Account Intelligently

Maintain Separate Books and Bank Accounts 

Ensure all receipts, expenses, investments, and liabilities of the HUF are recorded distinctly from personal finances. A separate bank account prevents commingling, which may attract scrutiny.

Proper Documentation for Asset Transfers

When transferring assets or gifting funds to the HUF:

• Execute gift deeds specifying donor, recipient (HUF), amount or asset details.
• Retain valuation reports for property or securities.
• In the case of ancestral assets, documentation proving lineage and HUF ownership must be in place.

Evaluate Old vs New Tax Regime for HUF

• Under the old regime, you may claim various deductions (80C, 80D, etc.) but at higher tax rates.
• Under the new regime, slab rates may be lower for certain income ranges, but deductions are restricted.
  Assess both regimes annually to decide which yields lower tax for the HUF’s income. For FY 2025-26, recent Budget announcements indicate expanded rebates up to ₹12 lakh taxable income, which could benefit the HUF if its net income is within that threshold.

Monitor Regulatory Changes

Tax laws evolve annually through the Union Budget and Finance Act. Stay up to date with amendments affecting:

• Exemption limits (e.g. LTCG threshold changes).
• Deduction ceilings (e.g. Section 80C/80D).
• Slab revisions under old/new regimes.

Regular Reviews and Planning

• Conduct periodic reviews of HUF income sources and investments.
• Plan contributions to 80C instruments early in the fiscal year to optimise cash flows.
• Use budgeting tools or simple spreadsheets to track HUF cash flows and tax projections.
• Engage a chartered accountant to validate compliance and suggest refinements.

Conclusion

A Hindu Undivided Family (HUF) offers a structured way to combine family assets and potentially reduce the collective tax burden. By filing a separate return, claiming deductions under Section 80C, 80D, 80G, leveraging capital gains exemptions, and splitting income-producing assets, you can achieve tax savings. However, proper documentation, regular monitoring of legislative changes, and clear communication among members are crucial to avoid any issues. Evaluate old and new tax regimes each year for the HUF, and consider professional advice for complex situations. When managed properly, an HUF can serve as a powerful tool in your journey to save income tax effectively. 

Additional Read: How to Open a HUF Demat Account & Documents Required for HUF?