Understanding HUF and the Tax Advantages It Offers

In the context of Income Tax in India, the full form of HUF is Hindu Undivided Family. The Income Tax Act, 1961 recognises HUF as a type of non-individual taxpayer, which means it has certain obligations and rights, just like any other taxpayer. However, an HUF can only be set up by individuals with a common ancestral lineage. Therefore, in order to receive the tax perks of a Hindu Undivided Family, members of the same extended family unit need to form this entity.

Members of an HUF can include the head of the family, also called the Karta, and other relatives descending from a common ancestor. Once formed and registered, the HUF will have a separate PAN (Permanent Account Number) can legally have an income, own property, and pay taxes as a legally independent entity.

It is important to note that although HUF is governed by the Hindu Law, it is not limited to Hindu families only. Jain and Sikh families are also treated as HUF under the section 2(31) ​ of the Income Tax Act, 1961.

The Karta acts as the head of the HUF, while the other family members who are part of this tax paying entity are termed as coparceners. Before the 2005 amendment, only the senior-most male of the family could become Karta of the HUF and upon his demise, the next in line would also be a male. After the amendment in 2005, females are also considered coparceners and can take the role of the next Karta, if there are no male coparceners, or not interested in taking up the role or not ready for it.

Firstly, it is important to understand that as per the Income Tax Act, 196, an HUF or Hindu Undivided Family cannot be created under a contract. An HUF is formed automatically in a Hindu (or Sikh/Jain) family. To form an HUF, all members of the family must descend from a common ancestor, i.e. have a common lineage. This includes the wives and daughters as well. Important pointers that define the eligibility criteria for forming an HUF include:

• There should be a family, one person cannot form an HUF
• Upon marriage, HUF can be formed which includes the husband, wife and their children
• There must be a common ancestor
• It will include unmarried daughters and wives alike
• Apart from Hindus, Jains and Sikhs can also form an HUF

Setting up an HUF is primarily done as part of estate planning and needs to be initiated by the Karta, typically the senior most male member of the family. Once the decision to form a HUF has been made and assets or income that will be part of the HUF have been identified, the below steps needs to take to form a HUF:

Below are some key features of a HUF that one should consider before initiating the process of forming this separate tax entity:

One of the primary tax benefits of an HUF is that it is regarded as a separate taxpayer. This results in a separate basic exemption limit, which may aid in lowering the family’s overall taxable income.

Another benefit is that the HUF can claim deductions like any individual. For example, if the HUF invests in specific tax-saving schemes under Section 80C, it can reduce its tax liability by up to INR 1.5 lakh annually. This is on top of the deductions claimed by individual family members. Below is a list of the key tax saving investments/expenses apart from Section 80C that a HUF can make to reduce tax outgo:

• Payment of premiums for life insurance policies purchased for HUF members (part of Section 80C)
• Payment of health insurance premium on policies purchased for HUF members (part of Section 80D
• Payment of salaries to HUF members which can be claimed as expense by the HUF to reduce tax outgo
• Investment in various tax-saving investments such as National Savings Certificate, Equity Linked Saving Schemes, Unit Linked Insurance Plans, etc.

However, benefits u/s 80C, 80D and other subsections of Section 80C can only be claimed if the HUF files tax returns under the old tax regime. Similar to individual tax payers, HUF cannot claim such tax savings in the case of the new tax regime.

In addition, gifts received from certain relatives are not taxable. A well-planned HUF structure can also spread income among family members, minimising clubbing of income. That means fewer tax hassles for everyone involved. In many cases, an HUF pays less total tax than if family members had reported the same income individually.

Like individuals, HUFs can choose between the old and new tax regimes. The old regime allows various deductions and exemptions, while the new regime offers lower slab rates but popular deduction options such as Section 80C, 80D, etc. cannot be availed.

The below table summarises the income tax slabs and rates applicable under the old tax regime as well as the new tax regime in the case of HUF for FY 2025-26 (AY 2026-27):

Filing HUF income tax returns is much like filing returns for an individual, but you must pay attention to some extra details. Here’s how it works:

• 1. The HUF must calculate its income from various sources, including rent, business, and investments.
• 2. HUF can file taxes using ITR-2, if the HUF does not have income under the head “Profits or gains of business or profession”. If the HUF is declaring income from business, ITR-3 needs to be filed. In case HUF income during the fiscal exceeds Rs 50 lakh, ITR 4 needs to be filed.
• 3. Like individuals, HUFs can claim deductions under Section 80C, 80D, and various others sub-sections of the Income Tax Act.
• 4. HUF may also be eligible to pay Alternate Minimum Tax if the tax payable is lower than 18.5% (including cess and surcharge) of “Adjusted Total Income”, subject to applicable terms and conditions.
• 5. The return is submitted through the Income Tax Department’s e-filing portal and return must be e-verified in order to be considered by the tax authorities.

The due date for filing ITR by HUF is typically 31 July of the applicable Assessment Year. However, this is extended to 31 October, in case the HUF accounts need audit. Similarly, in case the HUF is required to furnish a report in Form No. 3CEB u/s 92E, the due date of filing is 30th November of the assessment year. These due dates may be extended through an announcement made by tax authorities.

While there are several similarities, HUF taxation differs from individual taxation in a few key ways. But, by setting up an HUF, you create more than one taxable unit in your family. This often leads to superior tax efficiency, especially when combined with strategic investments. To get the maximum benefits, it’s important to know the differences, viz.:

As you can see, HUF files taxes separately and HUF members can also file taxes as individual tax-payers on income that is not earned from HUF assets/business. This has the potential of increasing the tax benefits under the old tax regime while also ensuring that a higher exemption limit can be claimed to reduce overall tax outgo for HUF members.

There are various scenarios in which gifts made by and received by a Hindu Undivided Family can be tax-free. Some of these scenarios include:

Let’s understand how such a tax benefit might work with an example of gifting money to family members. Suppose you transfer a large sum of money (greater than Rs. 50,000) to your wife directly, then any income she earns from that money is liable to be clubbed with your income under Section 64 (2). This could increase your tax liability.

But when you gift assets or funds to the HUF, the entity, in turn, can give that amount to your wife. Once that transfer is complete, any returns or profits she makes can be taxed in the HUF’s name or even in her name, depending on how the transaction is structured. This process can result in better tax savings for the family.

It’s also possible for an HUF to run a family business. Do note that a HUF is not a separate legal entity unlike a private/public limited company even though it has an independent identity in the eyes of tax authorities. There are some distinct tax benefits to gain from this. Some of them are -

• 1. The HUF can purchase raw materials, pay salaries to family members, and manage finances through its dedicated bank account. Profits count as the HUF’s income, which the Karta then declares in the tax returns.
• 2. Another advantage is that the HUF may employ its coparceners for business tasks, and these salaries are treated as business expenses. This can lower the HUF’s taxable profit and improve overall savings.
• 3. Yet another advantage is that the business doesn’t get tangled with individual tax returns, simplifying family bookkeeping.
• 4. Additionally, the HUF business can also act as a lender and provide loans to the coparceners at nil or significantly low interest rates, subject to various key terms and conditions. This can be immensely beneficial to the HUF members.

However, if the business grows significantly or deals with complicated transactions, the Income Tax Department may check how expenses and salaries are distributed. As with any structure, clear records, strong internal controls, and timely tax filings are vital. This approach also fits well with the bigger goal of carefully managing HUF income tax.

While HUF tax benefits are appealing, managing an HUF does pose some key challenges like -

• Some families find it challenging that the Karta, usually the oldest member, holds a lot of power in making decisions. This can create friction if the younger generation wants to introduce changes.
• Once you transfer property or funds to an HUF, they are part of the collective, and you lose individual control of the property or funds.
• An HUF is difficult to dissolve; it can be time-consuming and often requires a formal partition of the HUF assets among all family members.
• A HUF cannot become an equal partner in any company under the current rules, thereby limiting the HUF’s ability to form partnerships.

Apart from the above, HUF is currently losing its relevance is India due to a significant increase in the number of nuclear families and a marked reduction in the number of joint families. With this change, ancestral property or business management via the HUF route is on the decline.

If family members decide to close the HUF, they must carry out a formal partition of assets among all members of the HUF. An HUF can only be dissolved via complete partition.

In a complete partition of an HUF, each member receives a share of the HUF assets based on mutual agreement or legal guidelines. Once the partition of properties is completed, the HUF stops existing as a separate taxpayer and is thereby, stands dissolved.

The Income Tax Department expects clarity on how assets are split for tax purposes. Any income arising from these assets after partition/closure of the HUF belongs to individual members, not the HUF. So, it is vitally important to document everything, including a partition deed. Consulting a legal or tax professional is wise to avoid missteps during the process of complete partition or voluntary closure of a HUF.

Before forming an HUF, here’s a quick checklist to ensure everything is in place:

• Confirm Eligibility – Ensure the family meets the legal requirements for forming an HUF.
• Prepare HUF Deed – Draft a written document declaring the formation of the HUF. Details of all assets that will be part of the HUF and details of the Karta as well as coparceners are also included in this document.
• Apply for PAN Card – It is mandatory for HUF to have a separate PAN for tax filing purposes.
• Open a Bank Account – A dedicated HUF bank account should be created for handling transactions of this separate tax entity.
• Tax Filing Compliance – Keep accurate records of income and investments and file annual HUF income tax returns.
• Consider Tax-Saving Investments – Invest in tax-efficient instruments under Section 80C to reduce tax liability.

Following these steps ensures smooth operation and compliance with tax laws.