Tax Planning Through Hindu Undivided Family (HUF): A Smart Way to Save Taxes

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Tax Planning Through Hindu Undivided Family (HUF): A Smart Way to Save Taxes

Tax planning is an essential part of financial management, and one of the most effective ways to optimize taxes in India is through a Hindu Undivided Family (HUF). Many people are unaware that HUF is a legally recognized separate entity under the Income Tax Act, offering multiple tax benefits. Let’s explore how HUF can be leveraged for smart tax planning.

What is a Hindu Undivided Family (HUF)?

A Hindu Undivided Family (HUF) is a distinct legal entity formed by members of a Hindu, Sikh, Jain, or Buddhist family. It consists of:

  • Karta – The head of the family, usually the eldest male or female member, who manages the HUF.
  • Coparceners – Lineal descendants of the Karta, including daughters (post-2005 amendment to the Hindu Succession Act).
  • Members – Other family members who may not have direct rights to ancestral property but are part of the HUF.

The key advantage of an HUF is that it enjoys a separate PAN card and tax slab, independent of individual members.

Tax Benefits of an HUF

1. Separate Taxable Entity

A significant benefit of forming an HUF is that it is taxed separately from its members. This allows families to distribute their income and reduce their overall tax burden.

  • Example: If an individual earns ₹15 lakh annually and the HUF earns ₹6 lakh, they are taxed separately. Without an HUF, the total taxable income would be ₹21 lakh, pushing the taxpayer into a higher tax bracket.

2. Exemptions and Deductions

HUFs can claim various tax deductions under the Income Tax Act, including:

  • Section 80C – Investments in PPF, ELSS, LIC, NSC, etc.
  • Section 80D – Medical insurance premium.
  • Section 54, 54F, and 54EC – Exemptions on long-term capital gains when reinvested in specified assets.

3. Income Splitting

HUFs allow families to divide income between individuals and the HUF itself, reducing tax liability. Some common ways to do this include:

  • Rental income from properties owned by the HUF is taxed separately.
  • Business income, if the HUF is engaged in a family business.

5. Receiving Gifts & Capital Infusion

  • HUF can receive tax-free gifts from relatives.
  • Gifts from non-relatives up to ₹50,000 per year are tax-free under Section 56(2).

How to Form an HUF?

Creating an HUF is a simple process:

  1. Create an HUF Deed – A legal document stating the names of members and the objective of the HUF.
  2. Apply for a PAN Card – The HUF needs a PAN for taxation purposes.
  3. Open a Bank Account – Transactions related to the HUF should be conducted separately.
  4. Transfer Assets & Income Sources – Assign ancestral property, rental income, or business earnings to the HUF.
  5. File Tax Returns – The HUF must file separate income tax returns annually.

Example: How HUF Saves Taxes

Let’s assume:

  • Mr. A earns ₹25 lakh annually.
  • His HUF owns property generating rental income of ₹7 lakh.

Without an HUF, Mr. A would be taxed on ₹32 lakh. With an HUF, ₹7 lakh is taxed separately, reducing his tax burden by approximately ₹2 lakh per year.

Important Considerations

While an HUF provides tax benefits, it also comes with certain challenges:

  • Income Clubbing Rules: If a member contributes personal income to the HUF, future earnings may be clubbed back with the member’s income under Section 64(2).
  • Partition of HUF: Dissolving an HUF requires a formal partition and can have legal complications.
  • Limited Use in Nuclear Families: HUF is more beneficial for joint families with multiple income streams.

Understanding Section 87A Rebate

Section 87A of the Income Tax Act allows eligible taxpayers to claim a 100% rebate on their tax liability up to a specified income limit. This provision helps lower-income individuals and HUFs reduce their tax burden significantly.

Rebate Benefit Under Old Tax Regime (FY 2024-25)

Under the Old Tax Regime for FY 2024-25, the rebate under Section 87A is available under the following conditions:

·        If the taxable income does not exceed ₹5,00,000, the taxpayer is eligible for a rebate of up to ₹12,500.

·        This means that for individuals and HUFs with taxable income up to ₹5,00,000, the tax liability becomes zero after applying the rebate.

·        If the taxable income exceeds ₹5,00,000, the rebate is not available, and tax is payable as per slab rates.

 

Rebate Benefit Under New Tax Regime (FY 2024-25)

Under the New Tax Regime for FY 2024-25, the rebate under Section 87A is available under the following conditions:

·        If the taxable income does not exceed ₹7,00,000, the taxpayer is eligible for a rebate of up to ₹25,000.

·        This means that for individuals and HUFs with taxable income up to ₹7,00,000, the tax liability becomes zero after applying the rebate.

·        If the taxable income exceeds ₹7,00,000, the rebate is not available, and tax is payable as per slab rates.

Rebate Benefit Under New Tax Regime (FY 2025-26)

The New Tax Regime has undergone a significant change in Budget 2025. The rebate under Section 87A is now available under the following conditions:

·        If the taxable income does not exceed ₹12,00,000, the taxpayer is eligible for a rebate of up to ₹60,000.

·        This means that individuals and HUFs with taxable income up to ₹12,00,000 will have zero tax liability after applying the rebate.

·        If the taxable income exceeds ₹12,00,000, the rebate is not available, and tax is payable as per slab rates.

Key Points on Rebate & Capital Gains:

  1. Rebate under Section 87A applies only to individuals and HUFs whose total taxable income (excluding special income like capital gains) falls below the specified limit.
  2. Capital gains (long-term & short-term) are taxed at special rates and do not qualify for rebate under Section 87A.
  3. Example:
    • If your total taxable income is ₹6,50,000 (including ₹2,00,000 as long-term capital gains taxable at 10%), the rebate will not apply to the taxable capital gain portion.
    • Even if your total income is within ₹7,00,000 or ₹12,00,000 (as per the new Budget 2025 rebate limits), capital gains tax must be paid separately.

 

 

Final Thoughts

An HUF is an excellent tax-saving tool when structured properly. By leveraging separate tax filings, income splitting, and investment opportunities, families can significantly reduce their tax burden. However, careful financial planning and compliance with tax laws are essential to maximize benefits.

Are you considering setting up an HUF for tax planning? Seek professional advice to ensure you maximize the benefits while staying compliant with tax regulations! 🚀

 Team Eaztaxbiz

Your Tax Advisory Partner - 

Write us to ca@eaztaxbiz.com

Reach us : +91-9921010284

 www.eaztaxbiz.com


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