As the financial year draws to a close, taxpayers to scramble to minimize their tax outgo. While common deductions under Sections 80C and 80D get all the attention, one powerful yet underutilised tax-saving tool remains overlooked—the Hindu Undivided Family (HUF). Many shy away from it, fearing complexity, but with the right approach, an HUF can be a game-changer for tax planning and long-term wealth preservation.
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Here’s how you can leverage an HUF to unlock tax benefits while staying compliant with the law.
How to introduce capital into an HUF
A common misconception is that introducing funds into an HUF is as simple as gifting money. However, tax laws dictate how capital can be contributed:
Gifting money: While family members can contribute funds, any income generated from these funds may be clubbed with the donor’s income under Section 64(2) of the Income Tax Act.
Ancestral property: The most common way to fund an HUF is through inherited assets. Income derived from such property belongs to the HUF and is taxed separately.
Business income: An HUF can operate businesses, with profits taxed in its own name rather than in the hands of individual members.
Loans from members or outsiders: An HUF can take loans from family members or third parties. If a reasonable interest rate is paid, the income remains separate from the lender’s tax liability.
Key tax benefits of an HUF
The biggest advantage of forming an HUF is its ability to minimize tax liability. Here’s how:
1. Separate tax exemption limits: An HUF is treated as a distinct taxpayer and enjoys its own basic exemption limit of ₹2.5 lakh (or higher under the new tax regime), reducing the tax burden on individual family members.
2. Additional deductions: HUFs can claim deductions under Sections 80C and 80D, just like individuals. Strategic planning ensures these deductions are fully utilised for tax savings.
3. Capital gains exemptions: An HUF can invest in stocks, mutual funds, and property, with capital gains taxed separately. This allows tax optimisation, including exemptions like the ₹1.25 lakh limit under Section 112A for long-term capital gains on equity investments.
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4. Tax treatment of asset transfers: If a member transfers property to the HUF without adequate consideration, any income generated may be clubbed with the donor’s income under Section 64(2). Proper structuring helps avoid such tax pitfalls.
Challenges of forming an HUF
Despite the tax benefits, HUFs come with certain challenges:
Equal rights of members: Every member has equal rights to HUF property, making decision-making and property management complex.
Partition issues: Dissolving an HUF requires formal partitioning of assets, often leading to disputes.
Declining relevance: With nuclear families becoming the norm, the traditional joint family setup is less common. However, even nuclear families can establish HUFs for tax benefits.
To illustrate the tax-saving potential, consider this example: A forms an HUF with his wife and two children. He inherits a property from his father, generating an annual rental income of ₹7.5 lakh. A also earns ₹20 lakh per year as salary. Without an HUF, A’s total taxable income would be ₹27.5 lakh.
By creating an HUF, the rental income is taxed separately. After deductions, A’s taxable income is ₹20 lakh, while the HUF’s taxable income is ₹5.25 lakh.
Both A and the HUF claim ₹1.5 lakh deductions under Section 80C.
This strategic structuring reduces the total tax liability to ₹3.88 lakh—significantly lower than the ₹5.46 lakh tax burden without an HUF.
Should you set up an HUF?
If managed correctly, an HUF can be a powerful tax-planning tool. However, families must weigh the long-term implications, such as shared ownership rights and potential partition issues.
For those eligible, setting up an HUF can be a smart move to reduce taxes while securing financial stability for future generations. With the right planning, an HUF can help families build and preserve wealth efficiently.
Sujit Bangar is founder at Taxbuddy.com, a tax filing platform.
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