COURT KUTCHEHRY SPECIAL ON SMART TAX PLANNING WITH HUF
Smart Tax Move: How Hindu Undivided Family (HUF) Can Legally Double Your Tax-Free Income
Families can create a second tax identity through HUF, saving lakhs in taxes every year
Experts say new tax rules from April 2026 make HUF more powerful for middle-class households
By Our Business Reporter
New Delhi, January 8, 2026:
As India prepares to implement the new Income Tax Act, 2025 from April 1, 2026, tax experts are highlighting a little-known but powerful provision: the Hindu Undivided Family (HUF). By forming an HUF, families can legally create a second tax identity, effectively doubling their tax-free income.
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This strategy, though fully recognized under the law, remains underutilized. Chartered Accountants have explained that households can save lakhs annually by pooling family assets under an HUF and claiming separate deductions.
What is a Hindu Undivided Family (HUF)?
- Definition: A HUF is a separate tax entity consisting of all lineal descendants of a common ancestor, including wives and unmarried daughters.
- Legal recognition: The Income Tax Act, 1961 treats HUFs as independent taxpayers.
- PAN requirement: An HUF must apply for its own PAN card.
- Tax slabs: HUFs are taxed under the same slabs as individuals, though certain rebates (like Section 87A) do not apply.
How HUF Doubles Tax-Free Income
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Under the new tax regime (effective April 2026):
- Individuals earning up to ₹12.75 lakh annually can pay zero tax due to rebates and standard deductions.
- If a family creates an HUF, it can also earn ₹12.75 lakh tax-free under the HUF PAN.
- Together, the household enjoys ₹25.5 lakh tax-free income — a massive saving for middle-class and upper-middle-class families.
Example 1: Salaried Family with Rental Income
- Mr. Sharma earns ₹12 lakh annually as salary. Under the new rules, his income is tax-free.
- His family owns an ancestral property generating ₹12 lakh rental income.
- By transferring the property to the HUF, the rental income is taxed separately under the HUF PAN.
- Result: Both incomes are tax-free, saving nearly ₹3 lakh in taxes compared to filing under a single PAN.
Example 2: Business Family with Investments
- Mrs. Gupta earns ₹10 lakh annually from her boutique business.
- The family also has investments worth ₹15 lakh generating interest and dividends.
- By creating an HUF, the investments are transferred to the HUF PAN.
- Mrs. Gupta’s income remains tax-free, and the HUF’s investment income up to ₹12.75 lakh is also tax-free.
- Result: Household enjoys ₹22.75 lakh tax-free income, saving lakhs in taxes.
Example 3: Middle-Class Household Using Section 80C
- Mr. Verma earns ₹9 lakh annually. His family invests ₹1.5 lakh in PPF and ELSS under Section 80C.
- The HUF also invests ₹1.5 lakh separately under Section 80C.
- Both deductions are claimed independently, reducing taxable income further.
- Result: Household saves ₹3 lakh in taxes while building long-term wealth.
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Benefits of HUF Structure
- Separate deductions: Both individual and HUF can claim deductions under Sections 80C, 80D, etc.
- Asset pooling: Family assets like ancestral property, gold, or investments can be transferred to the HUF.
- Tax planning: Helps reduce overall tax liability for households.
- Legal recognition: Fully accepted by tax authorities, unlike informal arrangements.
Challenges and Limitations
- Not universal: Only Hindu, Sikh, Jain, and Buddhist families can form HUFs.
- Documentation: Requires proper PAN registration and separate accounting.
- No rebates: Section 87A rebate (₹25,000 for individuals) is not available to HUFs.
- Scrutiny risk: Improper use or lack of transparency can invite tax authority questions.
Expert Opinions
- CA Nitin Kaushik: “Most families operate with just one tax identity. By forming an HUF, they can legally double their tax-free income.”
- Policy analysts: With the new tax law replacing the old Income Tax Act, HUFs may become even more relevant.
- Tax planners: Stress the importance of maintaining proper records to avoid disputes.
Wider Context
- India has over 140 million households eligible to form HUFs, but only a fraction uses this provision.
- The government’s new Income Tax Act, 2025 will simplify tax structures, making HUFs more attractive.
- With rising costs and stagnant salaries, tax planning tools like HUFs are crucial for middle-class survival.
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Step-by-Step Guide to Forming an HUF
- Create HUF deed: A legal document declaring the formation of the HUF.
- Apply for PAN: Submit application to the Income Tax Department.
- Open bank account: Operate separately from individual accounts.
- Transfer assets: Move ancestral property, gold, or investments to the HUF.
- Maintain records: Keep accounts transparent to avoid disputes.
Case Study: Delhi Family Saves ₹5 Lakh Annually
- The Mehra family earns ₹15 lakh combined salary and ₹10 lakh rental income.
- By forming an HUF, they split income: ₹12.75 lakh under individual PAN, ₹12.75 lakh under HUF PAN.
- Result: Both incomes tax-free, saving nearly ₹5 lakh annually.
- The family reinvests savings into children’s education and retirement planning.
Conclusion
The Hindu Undivided Family (HUF) remains one of India’s most underrated tax planning tools. With the new tax rules offering higher exemptions, families that form HUFs can legally double their tax-free income, saving substantial amounts each year.
While documentation and compliance are essential, the benefits far outweigh the challenges. For middle-class households, this smart tax move could be the difference between financial strain and financial freedom.
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