The HUF tax hack everyone's talking about—but few understand

Mint

10-06-2025

If you were to take social media influencers at face value, a Hindu Undivided Family (HUF) might seem like the ultimate tax hack.
A new legal entity with its own PAN? Double the deductions, right?
No wonder that every year as tax season approaches, I get a familiar call:
"Vijay, should we open an HUF to save taxes?"
The short answer might be yes, but the real answer is: it depends.
Read this | Maximise your tax savings with an HUF: A smart yet underused strategy
Let's unpack what an HUF really is, how it works, when it makes sense, and when it can turn into a tax-planning headache.
First, what exactly is an HUF?
A Hindu Undivided Family isn't something you incorporate with paperwork. It comes into existence automatically when a Hindu (including Jain, Sikh, or Buddhist) male gets married and has children. Under Hindu law, this family becomes a legal entity, eligible to get a separate PAN, file its own return, and even own property.
Yes, the HUF can earn income, invest, pay taxes at slab rates, and claim deductions just like an individual. That means more flexibility in your tax planning arsenal.
So why do people use HUFs?
Two words: tax saving.
Imagine you're a salaried individual earning ₹25 lakh a year. You also inherit a house that fetches ₹6 lakh annually in rent. If this rent is added to your income, it's taxed at your slab rate: 30%. But if the same house is gifted to your HUF, that rental income is taxed under a different PAN, separately and likely at a lower rate.
The same logic applies to interest, dividends, capital gains, or even a business run under the HUF banner. The more income the HUF earns, the more room there is to optimise your tax outgo.
But what's the catch?
Here's the big one: you can't just 'shift" your income to the HUF.
For income to be taxed in the hands of the HUF, it must arise from assets gifted to or inherited by the HUF. Transferring your salary or business income to it? That's not valid. Worse, if you gift assets to your HUF, any income they generate could still be taxed in your hands under clubbing provisions (Section 64 of the Income-tax Act, 1961).
To steer clear of these pitfalls, HUFs should ideally be funded with:
Read this | FAQs on HUF: Tax benefits, formation, and key rules explained
So while it may be tempting, you can't route your salary or existing investments through the HUF and expect to save on taxes magically.
Legal vs Practical: Where people go wrong
Many taxpayers start an HUF, transfer money from their personal account to it, and begin investing, expecting tax breaks. This often raises red flags, especially if the amounts are large or frequent. If a tax officer suspects that the HUF is being misused as a personal tax shelter, reassessments and penalties may follow.
Another wrinkle: HUFs are legal persons, and over time, all coparceners (i.e., family members) gain rights to the assets. If you ever dissolve the HUF or want to sell its assets, every coparcener must sign off. Disagreements can, and often do, lead to prolonged family disputes.
Also worth noting: since the 2005 amendment to the Hindu Succession Act, daughters are coparceners too, with equal rights. This is a landmark step toward equality, but it also adds legal complexity to HUF-held assets.
When does an HUF make sense?
An HUF can be a smart tool if you're receiving ancestral wealth or gifts and want to structure it for long-term benefit. For example:
You inherit ₹1 crore from your father and invest it through your HUF.
The HUF earns ₹7 lakh a year in interest income — taxed in its own hands.
You save tax while building wealth under a common family structure.
HUFs are also useful for estate planning — they can hold family gold, property, and investments with continuity across generations.
Also read | Kalyani family dispute: Gaurishankar files documents to show HUF exists, belying brother's exclusive claims over assets
HUFs are among India's oldest legal tax-saving structures. Used right, they're a powerful ally in your financial journey. But beware the oversimplified advice floating around social media — 'open HUF and save lakhs in taxes" is rarely the full picture.
Like most tax tools, the HUF works best when used with clarity, planning, and the right intent.
Vijaykumar Puri, partner at VPRP & Co LLP, Chartered Accountants.