Hindu Undivided Family: A smart tax tool or legal headache? Would-be chartered accountant reveals the fine print

For many Indian families, the Hindu Undivided Family (HUF) remains a powerful, yet often misunderstood, tool for tax planning. Yet, as Krishna Prasath, a would-be Chartered Accountant, cautions, using an HUF isn’t simply about slashing taxes—it’s about understanding the structure, the rules, and the consequences that come with it.

“An HUF allows families to pool assets under a separate legal entity, with its own PAN and tax returns,” explained Prasath. “It’s especially useful for managing rental income, capital gains, or even running a family business under a single umbrella.”

Formed by Hindu, Jain, and Sikh families, an HUF comprises the karta, who traditionally is the eldest male, though senior women can also become kartas after the Hindu Succession (Amendment) Act of 2005. This significant change granted women equal coparcenary rights, a shift from earlier laws that allowed only male members to be coparceners.

“Today, wives and unmarried daughters are part of the HUF, and this change has brought a more equitable structure,” said Prasath. “An HUF can even be formed by a married individual from Jain or Sikh communities.”

Members of an HUF, known as coparceners, can pool assets such as gifts, inherited wealth, ancestral property, or proceeds from selling joint family assets. “The income generated from these collective assets is taxed separately under individual slab rates,” Prasath noted. “This allows the HUF to claim exemptions and deductions similar to those available to individual taxpayers.”

For tax purposes, an HUF enjoys the same slabs and deductions as individuals. Under the new tax regime for FY 2025-26, income up to ₹4 lakh is tax-free, with higher rates applying beyond that. Under the old regime, the exemption threshold starts at ₹2.5 lakh. “Moreover, an HUF can own residential properties and avail tax benefits on home loans,” Prasath added.

However, Prasath stresses that people often overlook the complexities behind forming and maintaining an HUF. “It’s easy to open an HUF account—just draft a legal deed, get a separate PAN, and open a bank account,” he said. “But dissolving it, especially during disputes, is a whole other story.”

Ownership becomes collective

A key point Prasath emphasises is that assets transferred to the HUF no longer belong to the individual. “Once you put income or assets into the HUF, they belong to the family as a unit,” she said. “The Karta manages it, but can’t claim personal ownership. This can become crucial if family relationships change or disputes arise.”

Partition is not simple

While forming an HUF might be straightforward, partitioning it is anything but. “Many people don’t realise that dividing an HUF is a formal legal process,” Prasath noted. “If there’s disagreement about property or assets, it could take years to settle, leading to legal and financial headaches.”

Clubbing provisions

Another common mistake involves transferring assets into the HUF without proper consideration. “If you transfer personal assets into the HUF and the tax department finds it lacks genuine purpose, the income from those assets could get clubbed back with your personal income under Section 64(2),” Prasath explained. “It’s a classic tax planning pitfall.”

Compliance is non-negotiable

While the HUF can save tax, it’s not a passive structure. “If an HUF’s income crosses certain limits, it needs proper books of accounts, regular tax filings, and possibly audits,” said Prasath. “It’s not a set-it-and-forget-it solution.”

Genuine purpose matters

Finally, Prasath emphasises that intent is everything. “If you form an HUF just to save tax, without genuine ancestral or family-owned income, it may not stand up to scrutiny from tax authorities,” he said. “Substance over form is what matters in tax law.”

She concluded with a word of caution: “The HUF is a great tool—but like any tax planning strategy, it’s only as good as the intentions and foresight behind it. Use it where it aligns with your family’s long-term goals, not just to lower your tax bill today.”

As India’s tax laws evolve and families grow more financially sophisticated, Prasath believes that understanding the nuances of the HUF structure can make the difference between smart tax planning and future disputes. “At the end of the day, an HUF is as much about family harmony as it is about tax savings,” she added.