How to save taxes using HUF?

Income Tax Tax Savings & Deductions
1

Back in the day, we used to have a lot of family-run businesses in India, with different members of the family contributing to the business in many ways.

To ensure that families stay together and all the earnings of the business stay within the family, the concept of Hindu Undivided Family or HUF was introduced.

These days however, HUF is used as a tool to plan finances and save taxes.

What is an HUF?

HUF is a distinct legal entity formed by members of a single family. It operates like a family club and can be established by Hindu, Jain, Sikh, or Buddhist families in India.

It has its own PAN and bank account, enabling it to generate income, own property, invest, and engage in business activities.

Who can form an HUF?

To form an HUF, you just need a family, typically consisting of a common ancestor, like grandparents or parents, and all their descendants.

The family members include husbands, wives, children, their spouses, and grandchildren.

In an HUF, there are three types of members:

  1. Karta: The Karta is usually the eldest male family member, responsible for managing and making decisions for the HUF.
  2. Coparcener: Coparceners are family members who automatically gain a share in the HUF’s property or assets by birth. They can even ask for a share or division of the HUF, if needed.
  3. Member: Members also have rights in the HUF’s assets and income, but unlike coparceners, they can’t demand a partition of the HUF.

How can you save taxes using HUF?

Below are some common scenarios where forming an HUF can help you save taxes:

  1. Owning a property in HUF’s name: An HUF can own any property including a residential house, and it can also avail deductions against home loan. Hence, if you take a joint home loan with HUF as the co-borrower, both you and the HUF can claim a deduction on home loan interest u/s 24(b) of up to ₹2 lakhs.
    Moreover, if there is some ancestral property that is generating rental income, you can transfer the property in HUF’s name and hence, now the rental income will be considered as the HUF’s income. This becomes beneficial when your income falls in a higher tax slab and HUF has no other income or falls in a lower income bracket.
    Hence, now the rental income will be charged at a lower tax rate and you might not have to pay any taxes at all if the total income is below ₹4 lakhs (or ₹2.5L under old regime).

  2. Opening a demat account on HUF’s PAN: You can open a demat account on HUF’s PAN.
    This way you get a separate demat account to invest and trade from. You also get an additional account to apply in IPOs and increase your chances of getting an allotment.
    Moreover, as long-term gains of up to ₹1.25L are exempt from taxes, you can invest some of the capital under HUF’s name so that you can avail this exemption on both your personal as well as HUF’s capital gains.

  3. HUF can claim 80C and 80D deductions: HUF can also invest in ELSS funds and claim a deduction of ₹1.5 lakhs u/s 80C.
    Moreover, even if an HUF cannot open a PPF account in its name, it can contribute to any of the members’ PPF accounts and claim 80C deduction on the same.
    Similarly, it can also claim 80D deduction on medical insurance premium paid for any of the members.

We’ve made a detailed video on HUF and covered more ways on how you can save tax using HUF, check it out:

What more ways can you think of? Let us know below!

1 Like
2

Thanks for this concise and useful write-up.

  1. Can I form an HUF with my wife, daughter, son-in-law and two grandchildren ? I and my grandchildren do not have taxable income whereas my wife, daughter and Son-in-Law have taxable income.
  2. I have not inherited any ancestral property or investment. What I have is out of my own earnings.
  3. Can I transfer my shares and MF investments to such an HUF?
  4. Will forming such an HUF be advantageous for me considering the above points?
3

Hey @nayakd1,

Yes, you can form an HUF. It is not necessary to have an ancestral property in order to form an HUF. Moreover, yes you can transfer such shares to HUF, however, the clubbing provisions will apply on any income earned from those shares.

Hope this helps!

4

Thanks for the concise and succinct reply.

5

Hi @Surbhi_Pal

I have opened HUF account exclusively for trading, where i am the karta.
Have following queries -

  1. I have given loan to HUF at 3% . Is this 3% permissible in IT return ?
  2. I would also employee some people who are not members of HUF and pay them salaries for their work ( like order punching, consultancy etc ) . Is this permissible to pay salary from HUF account to non members?
1 Like
6

Hello @Prateek_Kumar_Dhanwa

Please find the answers to your queries as below:

  1. You can give loan to HUF at 3%. There is no restriction on that. However, we recommend to keep proper documentation of the loan agreement and transaction shall take place through bank transfer and not cash.
  2. Yes, you can hire employees under HUF and pay salaries to them for the service they provide to HUF.
    You will be required to deduct TDS if applicable on salary payments u/s 192.

Thank you.

7

What are the negatives of HUF? You talked about the positives, I want to be aware of both pros and cons before starting one.

8

Hey @Chb,

Forming a HUF comes with its own complexities. The HUF’s common property cannot be sold without the consent of all members.

Moreover, at the time of partition as well all members need to agree to it. There may be disputes and legal hassles. The HUF also has to file an ITR every year.

Hope this helps!

9

what if the income is NIL for the year ?then also has to file the ITR ?

10

Hey @HIREiN,

If the income does not exceed the basic exemption limit, it is not mandatory.

Hope this helps!

11

I am revisiting your reply to my earlier query:

  1. Whether Karta has to be male family member? Whether my Daughter can be a Karta?
  2. Kindly explain how clubbing provisions will apply if I transfer my shareholdings to my HUF when it is formed.
  3. Once I form HUF, how will it start its activities since I have no inherited ancestral property? Shall I transfer some funds to it from my bank account? If yes, what will be Income Tax implication?
12

Hey @nayakd1,

A male member has to be the Karta. Moreover, gifts from members are exempt in the hands of HUF. Hence, there will be no tax liability when you transfer the shares to HUF. However, any income generated by selling the shares will be clubbed in your hands.

You can transfer funds to the HUF account as a gift.

Hope this helps!

13

Hullo All!

Regarding deductions under Sec 80D as applicable to HUF + individual:
Situation -
A] I am a Sr citizen with no medical insurance. Sec 80D permits me to deduct Rs. 50,000 annually as medical expenses in lieu of medical insurance premium.
B] I also manage a HUF as Karta and my son is a member.
C] My son too has no personal medical insurance. (He has general medical cover from the company where he works.)
Questions:

  1. Can I have medical insurance cover as part of HUF and deduct premium on it in my HUF ITR and still be eligible to claim Rs. 50,000 deduction in my personal ITR?
  2. Can my son seek medical insurance cover via HUF and can HUF claim deduction on the premium paid?

Thank you in advance for knowledgeable advice on the subject.

14

Hey @Yeti,

The HUF can claim 80D deduction for medical premium paid for any of the members of the HUF. The maximum amount of deduction is ₹25,000. If the member is a senior citizen, then the maximum deduction will be ₹50,000.
However, HUF is not eligible to claim a deduction for a preventive health check-up.

Hope this helps!

15

Somehow missed your reply earlier and just saw this, now. Thank you, Surbhi!
Part of my query remains - HUF can claim deduction under Sec 80D for medical insurance premium for its members including me is understood. However, additionally, can I (given that I do not have any medical cover in personal capacity) claim deduction in lieu of medical insurance under Sec 80D?

16

Setting up a Hindu Undivided Family (HUF) enables tax savings through income splitting among family members, utilizing separate tax entity status, owning properties for taxed income, and claiming deductions under various tax sections such as 80C, 80D, and 24. HUFs can also benefit from tax-free gifts, manage business income efficiently, and aid in estate planning. Proper documentation and compliance are essential. Consulting with a tax advisor ensures adherence to tax laws while maximizing tax-saving opportunities within the HUF framework.

17

Hi
Need help on below questions?

HUF account is setup in my father’s name.
Is there any upper limit on amount which I can transfer in HUF account tax free ? As far as I understood, as the amount is getting transferred from Member, it should be taxfree as gift, but wanted to confirm

Thanks a lot in advance and apologies if you have already explained in above but i couldn’t undertand

18

Hi @Vaibhav_Gupta,

Yes, gifts from members are exempted in the hands of HUF. There’s no upper limit for the same, however, is the amount is high, it is recommended to make a gift deed and have proper documentation of the same.

19

Creating a Hindu Undivided Family (HUF) is a tax-efficient way to save taxes in India. By pooling family assets and income under the HUF, members can avail separate tax deductions and exemptions, maximizing tax savings. Additionally, HUFs enjoy unique tax benefits like the ability to split income among family members, leading to reduced tax liability overall.

20

Thanks a lot for response Surbhi. This is reakky helpful

Is there any guidelines on how to make gift deed.
Also should amount transferred via gift deed needs to be reported as income in ITR of HUF and if yes, in what section