A HUF (Hindu Undivided Family) is a unique legal and tax entity that pools together and manages family wealth and investments. It is a family unit that comprises lineal descendants of a common ancestor and is treated as a person and separate tax entity. That is the beauty of this arrangement (if you’re a Hindu, Sikh, Jain, or Buddhist), since forming an HUF may help you get considerable tax savings.
You can split your income, double your exemptions (since HUFs have separate PANs and file tax returns independently) under various sections, and deploy/manage investments for collective gains.
▶️Click here to start your Onboarding
As mentioned, an HUF is always taxed as a separate entity from the individual family members, being eligible for all the deductions and exemptions that apply for individual PANs as per the Income Tax Act.
Like individual PANs, HUFs are also eligible for the basic tax exemption up to ₹2.5 lakh annually. If they earn below this threshold, they will not have to pay taxes.
HUFs also have eligibility for deductions up to ₹1.5 lakh under Section 80C. There are several investments that they can make to avail the same. These include:
HUFs may deploy investments in one or more applicable instruments to get the tax deductions mentioned above. Of course, while they cannot hold PPF accounts in their name, they can certainly make contributions to PPF accounts held in the names of their members to get deductions on the same.
In case the HUF and a member both have separate demat accounts, then there is an LTCG (long-term capital gains) exemption of ₹2.5 lakh every year (₹1.25 lakh) each, through splitting capital across the two demat accounts. Gains above the limit of ₹1.25 lakh for one account will be taxed at 12.5% with effect from FY 2024-25.
HUFs may reinvest their capital gains from the sale of residential property (Section 54) and the sale of any long-term asset (Section 54F). For instance, let’s say an HUF sells its ancestral property with gains of ₹50 lakh and then reinvests the same in buying another residential property. The whole capital gains will be exempted as per Section 54F in this scenario.
In case the HUF is both the co-borrower for your home loan and a co-owner of the home, then you can each get up to ₹3.5 lakh in total deductions. Here’s how:
Hence, the beauty of co-owning property with your HUF is that you can jointly repay the home loan and get full deductions, thereby maximizing your tax benefits considerably.
Did you know that you can also transfer your savings to the HUF or even gift your ancestral properties/assets to the entity? The income you generate from these assets/funds will be taxed in the hands of the HUF thereafter, not yours. So, essentially, you can gift a maximum of ₹4 lakh to your HUF with the whole income being tax-free.
Just compute the ₹2.5 lakh in basic exemption limits and the ₹1.5 lakh in deductions under Section 80C, and you will arrive at this figure.
The HUF is eligible to claim up to ₹25,000 in case it pays the health insurance premium of any member below the age of 60. At the same time, the deduction limit is ₹50,000 for senior citizens in this case.
The HUF may also donate money to various charitable institutions/entities and claim deductions on the same. This may go up to 50% or even 100%, depending on the institution/fund to which the money has been donated. So, if your HUF donates ₹1,00,000 to any charitable trust that is eligible for a 50% deduction, then it may easily claim ₹50,000 in tax deductions as per Section 80G.
Also Read : What is HUF & Benefits?
Here is a closer look at how much you can potentially save on taxes by using an HUF.
Particulars |
Only Individual PAN |
Individual + HUF PAN |
---|---|---|
Total Family Income |
₹20,00,000 |
₹10,00,000 + ₹10,00,000 |
Basic Exemption (₹2.5L each) |
₹2,50,000 |
₹2,50,000+ ₹2,50,000 = 5,00,000 |
Section 80C Deduction |
₹1,50,000 |
₹1,50,000+ ₹1,50,000 =3,00,000 |
Section 80D Deduction |
₹25,000 |
₹25,000 + ₹25,000 =50,000 |
LTCG from Equity (Section 112A) |
₹2,00,000 total (₹1,00,000 taxable) |
₹1,00,000 + ₹1,00,000 (fully exempt) |
Net Taxable Income |
₹15,75,000 |
₹5,75,000 + ₹5,75,000 |
Income Tax (Old Regime + LTCG Tax) |
₹2,72,500 |
₹54,000 |
Total Tax Saved |
— |
₹2,18,500 |
As you can see, you stand to save a sizable amount in taxes should you set up an HUF with your eligible family members. This is the reason why they are popular options for tax savings and collectively pooling and managing family wealth.
Read More : Demat Account for HUF - A Beginner's Guide
Creating a HUF is a smart choice from the prism of getting huge tax savings while also helping you optimize and manage investments better. It can also be a great way to create a sense of collective goodwill and cohesion among family members, while managing family and ancestral wealth/assets more efficiently.
From investments and passive income to joint business income/home ownership, HUFs are ideal solutions for people in various segments. At the same time, families that have sizable ancestral properties or multiple streams of income can also benefit from the creation of HUFs. Check the HUF setup guidelines and regulations carefully and start your journey towards building a more tax-efficient portfolio for your family.
Also Read : Difference Between Individual and HUF Demat Accounts
How to Open a Demat Account for Partnership Firms & Required Documents?
Groww helps you start your journey towards efficiently reaping the gains from your HUF with ease. You can easily set up your HUF demat account with Groww and start investing in mutual funds, stocks, and ETFs online.
Why choose Groww?
Here’s to smartly deploying investments from your HUF and making your portfolio more tax-efficient. On that note, click here to start your HUF investing journey today by opening your demat account at Groww.