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

A Hindu Undivided Family (HUF) is a unique legal entity that includes people of a common ancestor, descendants, their spouses, and their children. A Karta heads this entity, and an HUF can earn income, own property, and claim capital gains, exemptions, and more under the Income Tax Act.

When an HUF is declared as a tax entity under the IT Act, the members can split their income legally among themselves and reduce their total tax liability. However, if an HUF is dissolved, all the assets will be distributed among the remaining coparceners.

In this blog, we will explore the various HUF tax benefits available to those who are part of it.

What is a HUF or a Hindu Undivided Family?

HUF stands for Hindu Undivided Family, a family setting where all members are recognized as separate legal entities for taxation purposes. The members of a Hindu Undivided Family are only those who are descendants of a common ancestor. This includes the children and their wives.

The person who leads the HUF is known as the Karta, whereas the other family members are known as coparceners. The eldest male person of the family is generally known as the Karta. In a case where the Karta has two daughters and the father passes away, the eldest daughter takes his position and carries forward the HUF ahead.

Although the Hindu Law governs Hindu families, Sikh, Jain, and Buddhist families are also considered HUFs under the Income Tax Act.

Who are the Members of the Hindu Undivided Family?

An HUF, a separate legal entity, can be formed by at least two members from the same family and includes:

Karta: This is the person who leads the HUF, and it is usually the senior-most male or female member who manages the family affairs and has unlimited liability.

Coparceners: All the lineal descendants, whether male or female, of a common ancestor are known as coparceners. This now includes the daughters by birth, and they have equal rights in all the HUF assets, such as HUF property.

Other Members: The wives of the coparceners are also considered members of the HUF after marriage. They have the right to maintenance but cannot demand partition.

Tax Slabs of Hindu Undivided Family (HUF)

The tax slabs applicable to the HUF are the same as those of individual taxpayers under the new and old tax regimes.

Tax Slabs under the New Tax Regime for FY 2025-2026 (Illustrative)

Tax Slabs under the New Tax Regime for FY 2024-25

Old Tax Regime Slabs

Cess and surcharge will be applicable.
Note: HUFs are not eligible for the rebate under Section 87A.

What are the HUF Account Rules?

For a joint family setting to form an HUF, they must fulfill the following conditions:

• A single person cannot form it; a family is required.
• An HUF usually comes into existence automatically after marriage.
• HUF members are the lineal descendants of a common ancestor, including unmarried daughters as well as wives.
• Jains, Buddhists, and Sikhs can also form an HUF.
• Once the HUF has been formed, the members must register it with a formal legal deed, obtain a legitimate PAN number, and open a bank account. The formal deed will contain details about the HUF members and their business.
• Each member can contribute gifts or ancestral income to the common HUF corpus.
• The members of an HUF are eligible to claim the benefits under various sections of the Income Tax Act.

What are the HUF Tax Benefits?

The Hindu Undivided Family has a separate PAN card for its members and is eligible to claim tax benefits of the basic exemption limit under the tax regimes. However, they are also eligible for other benefits because of an HUF. Such benefits are:

Section 80C: The HUF is eligible for up to ₹1.5 lakh tax deduction on ELSS, PPF, life insurance, and more. 

Section 80D: The HUF is eligible for a deduction on health insurance premiums paid for an HUF member.

Section 80G: The HUF is eligible for tax deductions on eligible donations made by a Hindu Undivided Family. 

Home Loan: HUFs are also eligible for claiming a deduction on the interest paid on a housing loan.

Capital Gains: The HUF is eligible for tax exemption under sections 54, 54F, and 54EC on long-term capital gains re-investment. 

How Can You Save Taxes by Forming an HUF?

To understand how an HUF can save taxes, let us see an example:

Mr. Suresh Gupta started an HUF with his son, daughter, and wife as members. The property held by Mr. Gupta gives him an annual rent of ₹15 lakh, which was transferred to the HUF. On the other hand, Mr. Gupta's income from salary is around ₹20 lakh.

By forming an HUF, Mr. Gupta can save tax under the new tax regime for the financial year 2025-26 as follows:

 Comparison: Due to the tax arrangement, Mr. Gupta was able to save ₹2,52,200 from his overall taxable income. The Hindu Undivided Family (HUF) paid ₹46,800 in tax on the rental income because the rebate under Section 87A of the Income Tax Act is not available for HUFs.

How to Form a Hindu Undivided Family (HUF)

Formation of a Hindu Undivided Family is quite simple. All you need is to create an HUF deed, apply for a separate PAN card for the HUF, and open a bank account.

Step 1: Create a Hindu Undivided Family Deed – To form an HUF, individuals must draft a valid deed on stamp paper, which constitutes the entire structure of the HUF, including the Karta, Members, Coparceners, and the business of the Hindu Undivided Family (HUF).

Step 2: Apply For a Hindu Undivided Family (HUF) PAN Card - By filling out Form 49A online, you can apply for a HUF PAN Card. 

Step 3: Open A HUF Bank Account - Open a bank account in the name of the Hindu Undivided Family (HUF) by submitting an HUF Deed, PAN card, and the KYC documents. 

Step 4: Use the HUF - Once all the above steps are completed, you can start using the HUF for business operations, including investing or buying property. 

However, ensure that a single individual cannot form an HUF; it requires a family for its formation.

How to Determine the Residential Status of HUF

To determine the residential status of an HUF, it is essential to identify where the management and control of its affairs are located during the financial year.

Resident HUF: If the management or the control of the HUF is wholly or partly situated in India during the financial year, then the HUF is a Resident in India.

Non-Resident HUF: If the management and control of the HUF are situated outside India during the financial year, then in such a case, the HUF is considered a Non-Resident. 

Advantages of an HUF

Below are the advantages of forming an HUF:

• Separate PAN and tax savings
• Splitting of Income
• Succession planning ebenfirs. 

Disadvantages of an HUF

Below are the Disadvantages of an HUF:

• There are chances of disputes during partitions
• The compliance is complex. 
• Applicability is limited. 
• HUF cannot receive a salary. 

How is an HUF Dissolved?

To dissolve a Hindu undivided family (HUF), the HUF must undergo partition. Here, the assets are distributed among the family members who have the right to inherit the property. 

There are two types of partition:

Total Partition: Here, all the assets of a Hindu Undivided Family are divided among the family members, and the HUF is entirely dissolved.

Partial Partition: In this case, only a few assets of an HUF are divided, while the remaining assets are retained by the HUF and its business operations continue.

Now, the HUF member must ensure that the partition is registered and stamped to be legally valid. Along with the HUF's PAN card, it must also be surrendered to the tax authority for the process to be completed. 

Wrapping up

A Hindu Undivided family offers an array of tax benefits by providing separate tax exemptions and deductions. The tax deduction can lead to significant tax savings for the entire family, as income is divided among family members. 

For individuals seeking to understand HUF tax implications and NRI-specific ITR filing, connect with Savetaxs today.