Hindu Undivided Family – HUF Meaning, Benefits & How to Reduce Tax?

Forming a Hindu Undivided Family (HUF) enables families to pool their assets and be taxed as a separate entity from individual members. By creating an HUF, you can legally optimise your tax liability, as it allows the family to obtain an additional PAN card and claim separate deductions, ultimately reducing the total tax burden.

What is a HUF?

The HUF full form is Hindu Undivided Family. It is a unique legal entity under the Income Tax Act, where a family is treated as a separate single unit for tax purposes. It consists of a common ancestor and lineal descendants, including their wives and unmarried daughters. The head of the HUF is known as Karta and the members are known as coparceners. 

An HUF can own property, earn income, and claim tax benefits separately from its individual members, allowing families to save taxes by splitting income legally.

Who Can be Members of HUF?

An HUF can be formed by a family with a minimum of two members. The following are the members of a HUF

• Karta: The karta is the head of the HUF.
• Coparceners: All the male and female (including daughters) lineal descendants of a common ancestor. The daughters are also coparceners by birth and have equal rights. 
• Other Members: Wives of coparceners become members of HUF after marriage but are not coparceners themselves. 

It is important to understand that only coparceners have the legal right to demand partition of the HUF property, while the other members have maintenance rights. All coparceners are liable only for their respective shares in the HUF, whereas the Karta has unlimited liability for all dues of the HUF, including tax liabilities.

Determining the Residential Status of HUF

The residential status of a Hindu Undivided Family (HUF) is determined based on where the control and management of its affairs are located during the financial year.

Resident HUF

An HUF is Resident in India if its control and management are wholly or partly situated in India during the previous year.

If the Karta of a Hindu Undivided Family (HUF) is resident and ordinarily resident in India, then the HUF is also treated as resident and ordinarily resident. However, if the Karta is resident but not ordinarily resident, then the HUF is considered resident but not ordinarily resident.

Non - Resident HUF

An HUF is Non-Resident if its control and management are wholly situated outside India during the previous year.

How to Form an HUF?

Forming a Hindu Undivided Family (HUF) is simple and involves steps like creating a HUF deed, applying for a HUF PAN card, opening a bank account, and starting the operations of the HUF. 

One person cannot form HUF, it can only be formed by a family. A HUF can be created upon marriage. It includes the husband, wife and their children.

HUF Tax Slabs

The income tax slabs applicable to an HUF are the same as those for individual taxpayers under both the Old Regime and New Regime.

New Tax Regime Slabs FY 2025-26

New Tax Regime Slabs FY 2024-25

Old Tax Regime Slabs

Surcharge and cess will be applicable.

HUF Tax Benefits

HUFs enjoy several tax benefits under the Income Tax Act. The income tax slabs for HUFs are the same as those for individuals, with a basic exemption limit of Rs. 2.5 lakh under the old regime and Rs. 4 lakh under the new regime for FY 2025-26. HUFs can claim deductions under Section 80C for investments like PPF and ELSS, Section 80D for health insurance premiums, and Section 80G for donations. They are also eligible for deductions on home loan interest repayments and can claim capital gains exemptions under  Sections 54, 54F, and 54EC when reinvesting proceeds as per law. 

Separate PAN & Basic Exemption Limit

HUF is treated as a separate legal entity. Just like an individual, a HUF gets basic exemption limits, helping split income and reduce tax liability. 

Claim Deductions

HUF can claim deductions such as Section 80C up to Rs. 1.5 lakh and Section 80D for health insurance premiums paid for its members. 

Capital Gains Exemption

HUF can claim exemptions under Section 54, 54F, and 54EC on capital gains similar to individuals. 

Income Splitting

Families can split income between the individual members and HUF by earning income in the HUF's name. This ensures that the income is not clubbed and is taxed at lower slab rates. 

How to Save Taxes by Forming HUF

Let’s understand how an HUF is taxed with an example – 

Mr Rajesh Chopra decides to start an HUF with his wife, son, and daughter as members. The property held by Mr. Chopra earns an annual rent of Rs. 15 lakh which was transferred to the HUF. Mr. Rajesh Chopra has an income from salary of Rs. 20 lakh. 

By creating a HUF, Mr. Chopra can save tax under the New Tax Regime for FY 2025-26 as follows:

Due to this tax arrangement, Mr. Chopra saved Rs. 2,52,200 in taxes. The HUF paid Rs. 46,800 tax on the rental income, as the rebate u/s 87A is not available for HUF.

HUF Advantages  

The following are the advantages of forming an HUF:

• Separate PAN and tax savings
• Income splitting
• Succession planning benefits

HUF Disadvantages

The following are the disadvantages of forming an HUF:

• Partition disputes
• Complex compliance
• Limited applicability
• HUF cannot receive salary

Dissolution of a HUF

A Hindu Undivided Family (HUF) can be dissolved through partition, where the assets are distributed among the coparceners (family members with inheritance rights). This partition may be:

• Total Partition: All assets of the HUF are divided, and the HUF ceases to exist.
• Partial Partition: Only some assets are divided, and the HUF continues for the remaining assets.

For the partition to be legally valid, a partition deed must be drafted, stamped, and registered. The HUF’s PAN card is surrendered to the tax authorities to complete the dissolution process.