Unlocking Tax Savings: Is a Hindu
Undivided Family (HUF) Right for You?

A Hindu Undivided Family, or HUF, is a special type of tax and legal organization that administers and pools family assets. It is a family unit that is considered a distinct tax entity, comprising a person and their lineal descendants, all of whom are related through a common ancestor. If you're a Buddhist, Sikh, Jain, or Hindu, the beauty of this arrangement is that creating a HUF may enable you to receive significant tax savings.

Since HUFs have distinct PANs and file tax returns separately, you can split your income, double your exemptions under different sections, and deploy/manage investments for group gains.

Tax Benefits of an HUF (With Practical Examples)

As previously stated, under the Income Tax Act, a HUF is always treated as a different entity from the individual family members and is therefore qualified for all of the deductions and exemptions that are available to individual PANs.

1. Basic Tax Exemption - ₹2.5 Lakh Per Year

HUFs are also entitled to the basic tax exemption up to ₹2.5 lakh per year, just like individual PANs. They will not be required to pay taxes if their income is less than this amount.

1. Section 80C - Deductions Up to ₹1.5 Lakh 

Under Section 80C, HUFs are also eligible for deductions up to ₹1.5 lakh. To achieve this, individuals can invest in various ways. These consist of:

• NSC (National Savings Certificate)
• PPF (Public Provident Fund) Contributions 
• SSY (Sukanya Samriddhi Yojana) 
• ELSS 
• 5-Year Tax-Saver FDs (Fixed Deposits)
• Home Loan Principal Repayment
• Life Insurance Premiums 
• Stamp Duty & Registration Costs 
• Senior Citizen Saving Scheme (SCSS)
• Unit Linked Insurance Plan (ULIP) 
• Pension Plans 
• Tuition Costs 

To receive the aforementioned tax deductions, HUFs may invest in one or more suitable securities.  Naturally, they are unable to have PPF accounts in their names, but they can contribute to PPF accounts in their members' names and receive deductions for doing so.

1. LTCG Exemption (Equity) - ₹1.25 Lakh 

If a member and the HUF have different demat accounts, they can split their capital between the two accounts and receive an annual LTCG (long-term capital gains) exemption of ₹2.5 lakh (₹1.25 lakh) apiece.  With effect from FY 2024–2025, gains over ₹1.25 lakh for a single account would be subject to 12.5% tax.

1. Capital Gains Exemptions on Property - Sections 54 & 54F

The capital gains from the sale of any long-term asset (Section 54F) and residential property (Section 54) may be reinvested by HUFs.  For example, suppose a HUF makes ₹70 lakh from the sale of its ancestral house and uses the proceeds to purchase another residential property.  In this case, the entire amount of capital gains will be excluded under Section 54F.

1. Home Loan Tax Benefits - Joint Ownership with HUF

You can each receive up to ₹3.5 lakh in total deductions if the HUF is both a co-borrower on your home loan and a co-owner of the house. Here's how:

• Section 80C: Deductions up to a maximum of ₹1.5 lakh in home loan principal repayments 
• Section 24 (B): Deductions on interest repayment up to ₹2 lakh per annum 

Co-owning a home with your HUF has the advantage of allowing you to jointly repay the loan and receive full deductions, which significantly increases your tax benefits.

1. Savings Transferred to HUF Bank Account

Did you know that you can give the HUF your ancestral properties or assets, or even move your funds there?  After that, the HUF, not you, will be taxed on the income you make from these assets or funds.  In essence, you can give your HUF up to ₹4 lakh, with the entire amount being tax-free.

 To get this amount, simply add up the ₹1.5 lakh in deductions under Section 80C and the ₹2.5 lakh in basic exemption limitations.

1. Deduction Under Section 80D- Health Insurance

If the HUF pays a member's health insurance premium before the age of 60, it can claim up to ₹25,000.  However, in this instance, the senior citizen deduction cap is ₹50,000.

1. Donations Under Section 80G

The HUF can claim deductions and donate to many charitable organizations, just like a person.  This could rise to 50% or even 100%, depending on the fund or organization to which the donation has been made.  Therefore, if your HUF donates ₹50,000 to any charitable trust that is eligible for a 50% deduction, it can easily claim ₹25,000 in tax deductions under Section 80G.

Tax Savings Comparison between HUF vs Individual:

A closer look at the possible tax savings with an HUF is provided here.

Tax Comparison Table

As you can see, creating a HUF with your qualified family members could result in significant tax savings.  They are therefore well-liked choices for tax savings as well as for managing and pooling family resources collectively.

Conclusion: Should You Create a HUF?

From the perspective of obtaining significant tax savings and improving your ability to maximize and manage investments, establishing a HUF is a wise decision.  In addition to managing family and ancestral wealth and assets more effectively, it can be a terrific method to foster a sense of unity and goodwill among family members.

 HUFs are the best options for people in a variety of sectors, ranging from investments and passive income to joint business income and property ownership. The establishment of HUFs might also be advantageous for families with substantial ancestral properties or several sources of income.  Start the process of creating a more tax-efficient portfolio for your family by carefully reading the HUF formation rules and regulations.