This tax-saving tool can cut lakhs, unless you make this one mistake with your own money
If you use your personal income or savings to fund it, clubbing rules under Section 64(2) kick in. Any income generated from those funds will be taxed in your name, nullifying the benefit.
- Sep 12, 2025,
- Updated Sep 12, 2025 7:58 AM IST
Looking for a legal way to lower your tax burden while preserving family wealth? The Hindu Undivided Family (HUF) structure has helped Indian families save lakhs—but one mistake can turn this powerful tax tool into a liability.
At its core, an HUF is a separate taxpayer under Indian law. It can own property, file tax returns, run a business, and claim deductions—just like an individual. Families often use it to split income streams, take advantage of additional tax slabs, and protect inherited wealth. But without careful planning, the entire structure can collapse under scrutiny.
Only Hindus, Jains, Sikhs, and Buddhists can form an HUF, and it needs at least two members—a Karta (head of the family) and one coparcener. After the 2005 amendment to the Hindu Succession Act, daughters are also equal coparceners and can even act as Karta.
Setting it up is simple: prepare an HUF affidavit, apply for a PAN, open a bank account, and maintain books of accounts. But here’s where many go wrong—how they fund the HUF.
If you use your personal income or savings to fund it, clubbing rules under Section 64(2) kick in. Any income generated from those funds will be taxed in your name, nullifying the benefit. That’s the most common—and expensive—mistake.
In one case, a family inherited ₹1.2 crore through a Will, set up an HUF, and earned ₹8 lakh a year in rent. The income was taxed separately, saving over ₹1 lakh annually. In another, an individual gifted ₹50 lakh from his salary to the HUF. Interest income from fixed deposits was clubbed back into his personal return—resulting in no tax benefit.
When funded properly, HUFs can even be used to run businesses. One family launched a digital consulting firm using ₹10 lakh of inherited funds. The HUF paid salaries to working members and declared the remaining profit separately—saving ₹1.8 lakh in taxes annually.
Beyond income splitting, HUFs enjoy key tax perks: separate slabs (₹2.5 lakh basic exemption), capital gains rollovers under Sections 54 and 54F, and a full ₹1.5 lakh deduction under Section 80C.
But the structure isn’t without downsides. All members must agree to sell assets. Partial partitions aren’t recognized since 1979. Many fintech apps and platforms don’t support HUF onboarding. NRIs can be members, but managing compliance becomes complex.
HUFs are best used in tandem with private trusts or LLPs: HUFs for ancestral wealth, trusts for succession planning, LLPs for family-run businesses.
Dissolution requires a full partition, a deed, approval from the Assessing Officer, and closure of the HUF’s accounts and PAN.
Used strategically, the HUF is one of the most efficient wealth and tax planning tools in India. Used carelessly, it’s a fast track to tax trouble.
Looking for a legal way to lower your tax burden while preserving family wealth? The Hindu Undivided Family (HUF) structure has helped Indian families save lakhs—but one mistake can turn this powerful tax tool into a liability.
At its core, an HUF is a separate taxpayer under Indian law. It can own property, file tax returns, run a business, and claim deductions—just like an individual. Families often use it to split income streams, take advantage of additional tax slabs, and protect inherited wealth. But without careful planning, the entire structure can collapse under scrutiny.
Only Hindus, Jains, Sikhs, and Buddhists can form an HUF, and it needs at least two members—a Karta (head of the family) and one coparcener. After the 2005 amendment to the Hindu Succession Act, daughters are also equal coparceners and can even act as Karta.
Setting it up is simple: prepare an HUF affidavit, apply for a PAN, open a bank account, and maintain books of accounts. But here’s where many go wrong—how they fund the HUF.
If you use your personal income or savings to fund it, clubbing rules under Section 64(2) kick in. Any income generated from those funds will be taxed in your name, nullifying the benefit. That’s the most common—and expensive—mistake.
In one case, a family inherited ₹1.2 crore through a Will, set up an HUF, and earned ₹8 lakh a year in rent. The income was taxed separately, saving over ₹1 lakh annually. In another, an individual gifted ₹50 lakh from his salary to the HUF. Interest income from fixed deposits was clubbed back into his personal return—resulting in no tax benefit.
When funded properly, HUFs can even be used to run businesses. One family launched a digital consulting firm using ₹10 lakh of inherited funds. The HUF paid salaries to working members and declared the remaining profit separately—saving ₹1.8 lakh in taxes annually.
Beyond income splitting, HUFs enjoy key tax perks: separate slabs (₹2.5 lakh basic exemption), capital gains rollovers under Sections 54 and 54F, and a full ₹1.5 lakh deduction under Section 80C.
But the structure isn’t without downsides. All members must agree to sell assets. Partial partitions aren’t recognized since 1979. Many fintech apps and platforms don’t support HUF onboarding. NRIs can be members, but managing compliance becomes complex.
HUFs are best used in tandem with private trusts or LLPs: HUFs for ancestral wealth, trusts for succession planning, LLPs for family-run businesses.
Dissolution requires a full partition, a deed, approval from the Assessing Officer, and closure of the HUF’s accounts and PAN.
Used strategically, the HUF is one of the most efficient wealth and tax planning tools in India. Used carelessly, it’s a fast track to tax trouble.