This tax move can double your tax-free income — and it’s fully legal; expert on smart tax moves

India’s tax law offers families a powerful but often overlooked strategy to legally reduce their tax burden and expand their investment capacity — and most households are not using it. According to chartered accountant Nitin Kaushik, the Hindu Undivided Family (HUF) structure remains one of the most underrated tools for tax planning, despite being fully recognised under the Income Tax Act.

Kaushik points out that most families operate with just one tax identity — the individual PAN. But the law allows a second, completely legal tax entity within the same household: the HUF. “This single step can double tax-free limits, unlock separate deductions and create an independent pool for investments,” he says.

An HUF is treated as a separate taxable person. It can earn income, own assets and claim deductions under sections such as 80C and 80D, as well as capital gains exemptions. Under the new tax regime, income up to Rs 4 lakh is taxed at zero — and this benefit applies independently to both an individual and the HUF.

Kaushik explains this with a simple example. If a family earns Rs 8 lakh, it does not have to be taxed under one PAN. The income can be split legally: Rs 4 lakh under the individual and Rs 4 lakh under the HUF. Both fall under the zero-tax slab. “This is not tax evasion. This is tax planning clearly allowed by the Act,” he says.

The advantages go beyond slabs. An HUF gets its own long-term capital gains exemption, its own deduction limits, its own tax return and even the ability to invest and apply for IPOs separately — increasing the chances of allotment. “It effectively becomes a second financial engine for the family,” Kaushik notes.

HUF and tax slabs

A Hindu Undivided Family (HUF) can be formed by at least two members from a family with a common ancestor and lineal descendants, including Buddhists, Sikhs and Jains. An HUF comes into existence by birth or marriage and cannot be created by a single person. The head of the family, known as the Karta, manages its affairs, while coparceners—both sons and daughters by birth—have equal rights in ancestral property and can seek partition.

For tax purposes, an HUF is treated as a separate entity. Its residential status depends on where it is controlled and managed, largely linked to the Karta’s status. HUFs follow the same tax slabs as individuals under both old and new regimes, though rebates are not available. Key benefits include separate basic exemptions and deductions under Sections 80C, 80D, 80G, home loan interest, and capital gains reinvestment relief—making HUF a useful tool for tax planning and income structuring.

Legally, an HUF is not a company, trust or partnership. It is simply a family unit recognised under Hindu law, managed by a Karta, with members and coparceners having defined rights. Income can flow into the HUF from four compliant sources: ancestral property, gifts (within tax rules), business income and investment income.

However, Kaushik cautions that misunderstandings can create problems. Property inherited from grandparents can usually be treated as HUF property, but property inherited directly from a father typically cannot. Similarly, gifts received from non-members of the HUF may become taxable if not structured carefully.

Setting up an HUF, he says, is straightforward — a declaration, identification of the Karta, listing of members, a separate PAN and a bank account are enough to create a permanent, independent taxpayer.

Families with investments, rental income, ancestral assets, real estate dealings or long-term wealth plans stand to benefit the most. “For such households, an HUF doesn’t just save tax — it creates a parallel compounding base for the future,” Kaushik says.