How to Save Taxes by Creating a Hindu Undivided Family (HUF) ?

A Hindu Undivided Family (HUF) is a separate legal entity distinct from its members. It is typically established as a family structure to achieve tax savings through the pooling of assets or investments.

Key Concepts in HUF: Karta, Coparceners, and Members

• Karta: The head of the HUF, called the Karta, manages the HUF’s affairs. Generally, the eldest male member of the family becomes the Karta. Upon the death of the current Karta, the eldest male member assumes the role.

• Coparceners: Under Hindu law, any person (male or female) born into a joint family within four levels of lineal descent from a common male ancestor is a coparcener. Even adopted children qualify as coparceners.

• Members: Individuals joining the family by marriage are considered members. Coparceners can seek partition and may also become Karta, while members have the right to maintenance and receive their share upon partition.

Since 2005, daughters have the same rights as sons regarding HUF status. They remain coparceners in their father's HUF even after marriage, while becoming members in their husband's HUF.

Formation of an HUF

• An HUF can be formed by Hindus, Sikhs, Jains, and Buddhists. It must be formed by a family.

• The HUF is established by creating an HUF deed on stamp paper. Following this, a PAN is obtained in the name of the HUF, and a bank account is opened.

• The HUF’s corpus is often made up of ancestral properties, gifts, inheritance, or contributions made by its members.

  
  

Types of Income an HUF Can Earn HUFs can earn income from various sources except salary. Common types of income include:

• Rental Income from House Property

• Business Income

• Capital Gains

• Income from Other Sources

  
  

Taxation Benefits of an HUF HUFs are taxed similarly to individuals, with several advantages:

• The tax rate for an HUF is the same as for individuals, including the basic exemption limit.

• At least two coparceners are required to qualify as an HUF for tax purposes.

• HUFs can claim deductions (in old regime) such as:

  • Section 80C: Up to ₹1.5 lakh for specified investments.

  • Section 80D: Medical insurance premium of up to ₹25,000, or ₹50,000 if a member is a senior citizen.

  • Section 80TTA: Interest on savings account of up to ₹10,000.

  • Section 54: Exemptions from capital gains.

  • Section 24B: Interest paid on home loans.

• HUFs can engage in business activities and pay salaries to family members involved in the business.

• Gifts up to ₹50,000 received from non-relatives are non-taxable.

• By registering as an HUF, multiple homes can be owned without taxation as deemed let-out properties.

• Transferring personal property to an HUF without proper sale consideration results in the income from such property being taxable in the hands of the individual, not the HUF.

  
  

For example:-  Ram is working in a MNC, earning a salary of Rs. 55 lakhs after a standard deduction of Rs. 75,000. He also has interest income from Fixed Deposit Receipts (FDR) of Rs. 5 lakhs.

Then in Scenario 1: Ram is not created HUF:- 

Particular	Amount
Income from Salary	55,00,000
Income from Other Source	5,00,000
Total Income	60,00,000
Tax as per Slab Rate	15,00,000
Surcharge @ 10%	1,50,000
Cess @ 4%	66,000
Total Tax	17,16,000

 Then in Scenario 2: Ram is crated a HUF at the beginning of the year and transferred the FDR funds into the HUF’s savings account and made a normal as well Tax saving FDR in the name of the HUF.

	Computation of Mr. Ram		Computation of Mr. Ram (HUF)
Particular	Amount	Particular	Amount
Income from Salary	55,00,000	Income from Other Source	5,00,000
Income from Other Source	0	Gross Income	5,00,000
Total Income	55,00,000	Less: Deduction u/s 80C	1,50,000
Tax as per Slab Rate	13,50,000	Total Income	2,50,000
Surcharge @ 10%	1,35,000	Tax Payable	0
Cess @ 4%	59,400
Total Tax	15,44,400

After comparing both scenarios, you'll notice that Mr. Ram effectively planned his taxes, resulting in savings of Rs. 1,71,600. Likewise, you can reduce taxes on income from house property and capital gains by purchasing and investing in shares and mutual funds under the name of an HUF (Hindu Undivided Family).

Conclusion : Creating an HUF can lead to significant tax savings. By forming an HUF, families can claim separate deductions and exemptions similar to individuals, thus reducing their overall tax burden through an effective distribution of income.