How to save taxes using HUF?

In a family, different members can have various sources of income and 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. But these days, 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 if needed.
  3. Member: Members also have rights in the HUF’s assets and income, but unlike coparceners, they can’t demand a division 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 on the home loan. Hence, if 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 lower income. Hence, now the rental income will be charged at a lower tax rate and you might even have to pay no taxes on it if the total income is below ₹2.5 lakhs.
  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 lakh 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 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.

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

1 Like

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?

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!

Thanks for the concise and succinct reply.

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

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.

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

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!

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

Hey @HIREiN,

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

Hope this helps!