In India, families can legally pool their income and reduce their taxes by forming a Hindu Undivided Family (HUF). With its own PAN, bank account, and tax returns, it handles the family as a single entity. The HUF can be used to channel income from investments, rent, or inherited property. The major benefit? By distributing revenue among members and the HUF, it reduces the overall tax burden.
Meaning of HUF
In India, handling family finances and taxes can occasionally feel too much to handle, but the government understands this and has created ways to ease this confusion. One way to address this is by forming a Hindu Undivided Family (HUF). An HUF, which is recognized by Indian law, enables family members to pool their assets, take advantage of joint ownership, and—above all—benefit from separate taxes.
Benefits of HUF
Family wealth management and tax efficiency are the main reasons why people create an HUF. Among the main benefits are:
- Separate PAN & Tax Filing: An HUF can obtain its own PAN card and submit its own tax returns.
- Additional Tax Exemptions: Under income tax, the HUF and individual members each have different basic exemption levels.
- Pooling of Assets: The HUF makes shared ownership easier by allowing savings, property, and ancestral assets to be consolidated.
- Wealth Succession Planning: HUFs facilitate the organized transfer of wealth across generations.
HUF Taxation Rules
The same income tax slabs that apply to people also apply to an HUF, which is recognized as a separate taxpayer.
- Tax Slab: The individual slab rates under the previous and present regimes are the same as the current HUF tax slab.
- Income Sources: HUF may receive income from investments, capital gains, property ownership, or other sources. Members’ salaries, however, cannot be transferred to the HUF.
- Deductions: Deductions under 80D (medical insurance), 80C (investments, insurance), and other sections are available, based on your chosen regime.
- TDS & Advance Tax: Like individuals, HUFs are likewise responsible for paying TDS and advance tax.
How to Create an HUF Account in India
Although establishing an HUF is rather easy, there are legal requirements that must be met:
- Make an HUF Deed: A formal document outlining the family’s plan to establish an HUF and naming the Karta and its members.
- Apply for a PAN Card: The HUF requires a different PAN.
- Create a Bank Account: Create an HUF account in the HUF’s name using the PAN and deed.
- Capital Contribution: To create the HUF’s corpus, transfer gifts, money, or ancestral property into the organization’s account.
- Begin Operations: The HUF is now able to invest, own real estate, and submit separate income tax reports.
What is Hindu Undivided Family (HUF)?
According to Indian law, a Hindu Undivided Family (HUF) is a special type of family unit that shares resources, earnings, and duties. The Income Tax Act of 1961 acknowledges it as a different legal entity from its members.
It can be formed by whom? Jains, Buddhists, Sikhs, and Hindus can all create HUFs (they’re legally considered Hindus for this purpose).
- Members of HUF: The husband, wife, kids, and sometimes other family members are considered coparceners.
- Karta: The oldest member, who has historically been a man but is now accepted by the courts as a woman (since Delhi High Court ruling in Sujata Sharma v. Manu Gupta (2016) and subsequent acceptance), serves as the head and oversees the HUF’s operations.
How to Create an HUF Account in India
The process of opening an HUF account is simple. Here is a detailed guide:
- Create an HUF Deed
- Prepare a legal document declaring the formation of the HUF.
- Bring up the HUF’s name, the Karta’s specifics, and the family members.
- Request a PAN Card (a permanent account number is required for an HUF).
- On behalf of the family, the Karta submits the application.
- Create a Bank Account
- Create a bank account in the HUF’s name using the PAN card and deed.
- Transactions, investments, and income will all be handled through this account.
- Capital Contribution: Transfer gifts, money, or ancestral property into the HUF’s account. Gifts above ₹50,000 from non-family members to HUF are taxable, unlike gifts from relatives which are exempt.
- Begin Operations: The HUF is now able to invest, own real estate, and file separate income tax returns.
HUF Tax Slab and Taxation Rules
The tax slabs for an HUF are the same as those for persons, and it is taxed as a distinct entity. Families can choose to use the old tax regime, but the new one will be the default from AY 2024–2025.
ITR Forms: ITR-2 (general income), ITR-3 (business/profession), or ITR-4 (presumptive income) are the forms that HUFs submit.
Tax Slabs:
Old Regime (with exemptions & deductions)
- Up to ₹2.5 lakh → No tax
- ₹2.5 lakh – ₹5 lakh → 5% of income above ₹2.5 lakh
- ₹5 lakh – ₹10 lakh → ₹12,500 + 20% of income above ₹5 lakh
- Above ₹10 lakh → ₹1,12,500 + 30% of income above ₹10 lakh
New Regime (default, lower rates but fewer deductions)
- Up to ₹3 lakh → No tax
- ₹3 lakh – ₹7 lakh → 5% of income above ₹3 lakh
- ₹7 lakh – ₹10 lakh → ₹20,000 + 10% of income above ₹7 lakh
- ₹10 lakh – ₹12 lakh → ₹50,000 + 15% of income above ₹10 lakh
- ₹12 lakh – ₹15 lakh → ₹80,000 + 20% of income above ₹12 lakh
- Above ₹15 lakh → ₹1,40,000 + 30% of income above ₹15 lakh
- Rebate u/s 87A: Available up to ₹7 lakh income in the new regime (not in old regime).
ITR Forms (AY 2025–26)
- HUFs can file ITR-2 (for income other than business/profession)
- ITR-3 (if earning business/professional income)
- ITR-4 (for presumptive taxation under Sections 44AD/44ADA/44AE)
Tax Benefits of Forming an HUF
Since an HUF is regarded as a separate taxpayer, it can lower your family’s tax obligation. The main advantages are as follows:
Additional Tax-Free Limit Apart from the individual members, an HUF receives its own basic exemption of ₹2.5 lakh (Old & New Regime).
Allowable Deductions (Mainly Old Regime): HUFs are eligible for the following tax deductions:
- Section 80C: PPF, ELSS, LIC, and other funds up to ₹1.5 lakh.
- Section 80D: Premiums for health insurance.
- Section 24(b): Interest on home loans.
- Section 80G: Charitable contributions.
- Tax-Free Inheritance & Gifts (Both Regimes): Income from ancestral property and gifts from family members are exempt from taxes.
- Income Splitting (Both Regimes): The total tax burden on the family is reduced when income is split between the HUF and individual members.
- Succession Planning (Both Regimes): It facilitates better management of assets, investments, and family wealth.
These tax perks sound great, right? But an HUF isn’t for everyone—let’s see when it makes sense to create one.
When is HUF Beneficial and Who Should Use It?
- Joint Families: Because income might be taxed differently from individual income, HUF best suits joint families with enterprises, ancestral property, or pooled investments.
- High-Income Families: Using an HUF structure to share income allows those in higher tax brackets to save more.
HUFs can still be formed by nuclear families, but their benefits are restricted unless they have several sources of income, such as investments, rent, or business income.
Preferable Scenario: In general, joint families can benefit more from HUFs, although nuclear households should consider the expenses and advantages before forming one.
If you think an HUF suits your family, the next step is getting the paperwork right. Let’s look at the key documents you’ll need to open an HUF account.
Documents Required to Open an HUF Account
There are required paperwork to open and manage an HUF account. These facilitate the establishment of the HUF and provide the Karta, the family’s head, the authority to run it. The important documents consist of:
- HUF PAN Card: The HUF entity receives a unique PAN.
- HUF Deed: A legal document that lists the Karta, member names, and the HUF’s establishment is called an HUF Deed.
- Karta’s Identity & Address Proof: A voter ID, passport, or Aadhaar, as well as utility or bank statements, serve as proof of Karta’s identity and address.
- Pictures of Members: passport-sized pictures of the Karta and other participants.
- Proof of Bank Account: A copy of the HUF’s bank account information that is connected to the PAN.
Conclusion
In addition to being a legal organization, an HUF offers additional tax advantages and streamlines wealth administration. It helps lower the overall tax burden and is most effective for families with enterprises or shared assets. It’s not the best option for every household. The secret is to carefully assess your circumstances and determine whether creating an HUF actually improves your financial planning.
