HUF Tax Benefits: How to Save Income Tax?
- Simran Sahni
- Jun 12
- 9 min read

The Hindu Undivided Family (HUF) concept, which is deeply rooted in Indian culture, is more than just upholding family values. It is also about smart tax planning and tax savings. In this article, we will look at the various tax benefits available with the HUFs to reduce their tax liability, increase their savings, and promote financial stability. From defining a HUF to identifying the eligible tax deductions and exemptions available, we aim to provide a clear and easy understanding to maximize HUF tax benefits.
Table of Contents:
What is a HUF?
A HUF is a distinct legal entity as per the Income Tax Act. It is a unique feature of the Hindu Law that permits families to form a separate legal entity that shall include all the members throughout the generations. This concept is similar to the joint family system of India. A HUF is formed consisting of one common ancestor and all of his descendants, including wives and unmarried daughters. It is a legal entity that can own a property, conduct business, generate income, and incur expenses.
How is the Residential Status of HUF Determined?
Resident: For the purposes of income tax return filing for HUFs, a Hindu Undivided Family (HUF) is considered a resident in India if the control and management of its affairs is situated wholly or partially in India. In such cases:
If the Karta of the HUF is both resident and ordinarily resident in India, the HUF must file its return as a resident and ordinarily resident entity.
If the Karta is resident but not ordinarily resident, the HUF is treated as resident but not ordinarily resident for tax filing purposes.
Non-Resident: If the control and management of the HUF’s affairs are situated wholly outside India, the HUF becomes a non-resident and must follow special procedures for income tax return filing for HUFs as non-residents, including disclosing foreign income and assets.
Who are the Members of HUF?
Karta: The head of the HUF who holds unlimited liability for all family debts, including tax dues.
Minimum Membership: At least two members, a Karta and one coparcener, are required to constitute an HUF.
Members include all lineal descendants, grandfather, father, son, grandson—and female members (wife and unmarried daughters). However, only coparceners (those who acquire birthright in the family property) have:
The legal right to demand partition of HUF property.
A proportionate share of HUF income and wealth in the incometax return filing for HUFs.
Since daughters are now recognized as full coparceners, they too can claim partition and share equally in HUF income. All coparceners must be included in the HUF’s income tax return filing for HUFs, reflecting their respective shares, whereas the Karta remains liable for timely filing and payment of any tax due.
How to Form a HUF?
Draft the HUF Deed: Prepare a legal deed on stamp paper detailing the HUF’s name, Karta, coparceners, membership criteria, and nature of business or assets. All family members must sign the deed. This deed serves as proof for incometax return filing for HUFs.
Obtain a PAN: Apply for a separate Permanent Account Number (PAN) in the name of the HUF. A dedicated PAN is mandatory for filing HUF’s income tax returns.
Open Bank Account: Set up a bank account in the HUF’s name to ensure that all income and expenses flow through this account, simplifying incometax return filing for HUFs.
An HUF cannot be formed by a single individual; it arises automatically on marriage or birth within a Hindu family. Once constituted, the HUF must file its income tax return for HUFs under its own PAN, reporting all sources of family income and claiming deductions as applicable.
Tax Implications by Forming a HUF
Once a HUF is formed, it is treated as a separate entity for tax purposes. This separate legal entity recognition enables the HUF to be taxed separately from that of its member’s individual tax liabilities. The following are the tax implications of forming a HUF:
Separate tax slab: Similar to an individual taxpayer, the HUF also has a separate tax slab. Also, the HUF is entitled for deductions and exemptions under the Income Tax Act.
Unique PAN: HUF is required to obtain a separate Permanent Account Number (PAN), for financial and tax purposes.
HUF Tax Benefits
Forming a HUF has several tax benefits such as:
Double advantage: Since the HUF and its members are taxed independently, this permits families to split the income, thereby resulting in lower tax liability.
Deductions and exemptions: Similar to individual taxpayers, HUF can claim deductions and exemptions under various sections of the Income Tax Act like Section 80C, Section 24, and so on.
Income distribution: Income from the HUF’s investments, properties, or a family business is taxed in the hands of HUF only, often resulting in the lower taxation of the income.
How are HUFs Taxed?
A HUF’s income is taxed similarly to an individual taxpayer, but at the applicable slab rates of the HUF. A HUF may earn an income from the following sources: rent from property, business profits, investments, or gifts received. The tax liability is calculated after considering the deductions and exemptions. Furthermore, any income distributed to the HUF members is exempt from tax.
HUF Tax Benefits: An Example
Consider an example: Mrs. Y, a self-employed professional earning INR 18 lakhs per year, decides to form a HUF with her husband and two children. She also receives INR 2 lakhs as dividend income and has a mutual fund investment that gives INR 1.5 lakhs per year. Mrs. Y inherits a family property with an annual rent of INR 6 lakhs, which she chooses to transfer to the HUF.

The above example shows that by transferring the rental property income to the HUF, Mrs. Y is able to reduce her tax liability. This was possible only by distributing the income within the family more effectively. This shows the advantages of using HUF for tax planning, particularly where there are multiple sources of income apart from the professional earnings.
Disadvantages of Forming an HUF
While forming an HUF can unlock benefits in incometax return filing for HUFs, it also introduces several practical and compliance-related drawbacks:
1. Equal Rights of All Members
Uniform Ownership: Every member (including those added by birth or marriage) acquires an equal undivided share in the HUF property.
Decision-Making Gridlock: No asset can be sold, mortgaged, or transferred without the unanimous consent of all coparceners, making family agreements harder to reach.
Management Overhead: As the family grows, the HUF can become unwieldy—coordinating financial decisions and maintaining records for incometax return filing for HUFs gets increasingly complex.
2. Partition Triggers Dissolution
Inevitable Partition for Closure: The only way to dissolve an HUF is by partition, which all coparceners must agree upon.
Legal and Administrative Hassles: Partition involves drafting new deeds, re-valuing assets, and potentially lengthy court or revenue-officer proceedings.
Disputes and Costs: Dividing property often leads to valuations disputes, legal fees, and tax adjustments, adding both time and expense.
3. Continuous Assessment Until Partition
Ongoing Tax Returns: Once constituted, the HUF must file its income tax returns each year under its own PAN until a formal partition is completed.
Partition Claim Process: A coparcener’s claim for partition must be submitted to the assessing officer, who conducts an inquiry. Only after the inquiry concludes does partition affect the HUF’s tax status.
Shift in Tax Liability: Income from partitioned assets is taxed in the hands of individual members or any new HUF they form—necessitating fresh incometax return filing for HUFs and tracking asset transfers meticulously.
4. Unlimited Liability of the Karta
Personal Exposure: The Karta remains personally liable for all HUF debts, including tax dues. If the HUF cannot meet its obligations, creditors (including the Income Tax Department) can recover against the Karta’s personal assets.
Compliance Burden: Ensuring accurate accounting and timely incometax return filing for HUFs falls squarely on the Karta, who must maintain clear financial records and coordinate with coparceners.
By weighing these disadvantages, especially the management complexity, legal hurdles of partition, continuous assessment requirements, and the Karta’s personal liability, you can decide whether the incometax return filing advantages of an HUF outweigh its operational and compliance challenges.
FAQ
Q1. Who is the Karta of an HUF?
Karta is the manager and representative of the HUF. By law:
Designation: Traditionally the eldest male member becomes Karta. However, if he is unwilling or unfit, any other adult coparcener may be appointed by unanimous consent of the coparceners.
Powers & Duties:
Manages HUF property and business activities.
Executes all legal documents on behalf of the HUF.
Files the HUF’s income-tax returns and ensures timely payment of tax.
Liability: The Karta bears unlimited personal liability for all HUF debts and obligations (including tax dues).
Q2. Can a woman be HUF Karta?
Yes. Following the 2005 amendment to the Hindu Succession Act and subsequent judicial interpretations:
Equal Coparcenary Rights: Daughters became coparceners with the same birth-right as sons.
Supreme Court Ruling (2020): The Court confirmed that a daughter can also act as Karta if she is the eldest or is appointed by coparceners.
Practical Implication: A married daughter or sister can manage the HUF and sign its returns, just like any other coparcener.
Q3. If a person is survived by his wife and two daughters, can they form an HUF? Can there be an HUF with only female members?
Formation on Marriage: An HUF automatically arises on marriage when a Hindu man and his wife and their children form a family unit.
Deaths & Succession: If the male member (who would ordinarily be Karta) passes away, the next eldest coparcener (even if she is a daughter) may become Karta.
Only Female Members: Yes, post-2005 amendment, if a man dies leaving only a widow and daughters, they together constitute an HUF. The eldest daughter (or widow, if appointed) acts as Karta.
Q4. Who are HUF coparceners?
Coparceners are those members of a Hindu family who:
Acquire Interest by Birth: Sons and daughters born into the family become coparceners immediately.
Rights:
Have an undivided share in the HUF property from birth.
Can demand partition of the HUF estate at any time.
Liabilities: Share liabilities proportionately if HUF debts exceed its assets.
Non-members: Married-in daughters (before becoming coparceners) and other relatives are HUF members but not coparceners; they cannot demand partition.
Q5. Can the members of the HUF and the HUF itself separately claim deductions under Section 80C?
Yes. Since the HUF is a distinct taxpayer under its own PAN:
HUF’s 80C Limit: Up to ₹1,50,000 of eligible investments or expenses (PPF, ELSS, life insurance, etc.) can be claimed by the HUF.
Individual Members’ 80C Limits: Each coparcener and other individual family members can independently claim their own ₹1,50,000 deduction under Section 80C in their personal returns.
Combined Benefit: This effectively multiplies the family’s total deduction potential. For example, in a four-member HUF, you could claim up to ₹6,00,000 collectively under Section 80C (₹1.5 L for the HUF + ₹1.5 L each for three members).
Q6. Explain HUF in terms of taxation.
Under the Indian Income Tax Act, a HUF is recognized as a separate legal entity, which includes all the members of a Hindu family. A HUF can be simply formed by a married couple or a family, and it has a separate tax status, distinct from its members.
Q7. What are the tax benefits from creating a HUF?
The HUF is taxed independently which allows it to claim an additional exemption limit similar to an individual taxpayer. Thus, a family can split the income effectively, thereby reducing the overall tax liability by utilizing the basic exemption limit for the HUF.
Q8. What kind of income can a HUF earn?
A HUF can earn various types of income such as: income from property rent, business profits, investment income like interest or dividends, and gains from sale of investment property held by the HUF.
Q9. Are deductions under Section 80C allowed to HUFs?
Yes. HUF can claim deductions under Section 80C towards the investments or expenses, such as life insurance premiums for members, tuition fees for children’s education, and contributions to provident funds, and likewise. The limit of Section 80C for maximum deduction of INR 1,50,000 is also applicable.
Q10. Explain the tax implications of gifts received by HUF.
The gifts received by HUF from its members are not taxable. However, gifts received by a HUF from non-members in excess of INR 50,000 in a year is taxable, subject to certain conditions, where the gifts are exempt.
Q11. Can a HUF make investment in tax-savings instruments?
Yes. HUF can make an investment in tax-savings instruments such as Public Provident Fund (PPF), Equity-Linked Savings Scheme (ELSS), and fixed deposits, to reduce the tax liabilities.
Q12. Is it mandatory for HUF to file an Income Tax Return?
Where the total income of the HUF exceeds the basic exemption limit, it is mandatory for the HUF to file an Income Tax Return (ITR). Moreover, HUF can also file an ITR if it wants to carry forward a loss or claim a refund.
Q13. Can a HUF claim deduction for repayment of home loan?
Yes. A HUF can avail deductions for interest paid towards the home loan as well as for the principal repayment of home loan under Section 80C, provided the property is owned by the HUF.
Q14. Are there any special tax rates applicable for HUFs?
No. HUFs are taxed at the same rate as applicable to individual taxpayers. They can also choose between the new and the old tax regime.
Q15. Can a HUF carry forward the losses?
Yes. A HUF can carry forward the losses to set off against the future sources of income, except the loss under the head ‘Income from House Property’. However, the carry forward of losses are subject to the provisions of the Income Tax Act.
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