What is HUF?

This article covers the concept of Hindu Undivided Family (HUF) as a separate tax entity for Indian investors in FY 2025-26. We analyze its formation, membership rules, and distinct tax advantages, including the ability to claim separate Section 80C deductions. The guide explains the “Control and Management” test for residential status, current tax slabs under Old and New Regimes, and the critical distinction between total and partial partition for dissolution. We also examine how HUFs can double IPO allotment chances and the specific compliance requirements for maintaining this status.

Many Indian families sit on a goldmine of tax savings without realizing it. A Hindu Undivided Family (HUF) is not just a social concept; it is a legitimate tax-planning tool recognized by the Income Tax Act, 1961. By treating your family as a separate legal entity, you can effectively create a second PAN card for your household, unlocking an additional basic exemption limit and separate deduction buckets. As of November 2025, understanding how to structure an HUF is essential for mass affluent investors looking to optimize wealth across generations.

What is an HUF?

An HUF, or Hindu Undivided Family, is a unique legal entity that allows a family to pool assets and income to be taxed separately from its individual members. Under the Income Tax Act, an HUF is treated as a distinct “person” with its own Permanent Account Number (PAN). This means an HUF can own property, earn income (from rent, business, or capital gains), and file its own tax returns, completely independent of the Karta (head of the family) or other members.

For FY 2025-26, this structure is particularly powerful because it essentially doubles your tax-free limits. If you are in the 30% tax bracket individually, shifting income to an HUF can utilize the HUF’s lower tax slabs (starting at 5% or 10%), resulting in significant arbitrage. While the concept originates from Hindu Law, it is also applicable to Jain, Sikh, and Buddhist families in India.

Key Characteristics of an HUF

• Automatic Creation: You cannot “create” an HUF by contract; it arises automatically upon marriage. However, for tax purposes, it is recognized only when there is a corpus (asset) and a written deed.
• Separate Assessment: It files a separate ITR (usually ITR-2 or ITR-3) and has its own tax liability.
• Asset Ownership: It can hold assets like real estate, gold, Demat accounts, and mutual funds in its own name.

Who are the Members of HUF?

Understanding the hierarchy within an HUF is crucial for compliance and succession planning. The structure consists of two distinct categories of individuals: Coparceners and Members.

1. The Karta

The Karta is the manager or head of the family. Traditionally, this was the senior-most male member. However, following the 2005 amendment to the Hindu Succession Act and subsequent court rulings, daughters can also be Coparceners, and senior female members can be the Karta in certain situations. The Karta has the authority to sign documents, manage bank accounts, and make investment decisions on behalf of the HUF.

2. Coparceners

Coparceners are members who have a birthright to the HUF property. They can demand a partition (division) of the assets.

• Who qualifies: Sons and daughters (since 2005) are coparceners by birth.
• Rights: They have equal rights to the ancestral property and become the Karta upon the death of the previous Karta.

3. Members

Members are individuals who belong to the family but do not have a birthright to the property. They are entitled to maintenance (food, shelter, support) but cannot demand a partition.

• Who qualifies: Wives of coparceners (e.g., the Karta’s wife or son’s wife).
• Distinction: A wife is a member, not a coparcener. She cannot demand partition but is entitled to a share if a partition takes place.

HUF Residential Status

Unlike individuals whose residency depends on the number of days spent in India (182-day rule), an HUF’s residential status for tax purposes depends on where its “Control and Management” is situated. This is critical for NRIs managing family assets in India.

Resident HUF

An HUF is considered a Resident in India if its control and management are situated wholly or partly in India.

• Even if the Karta lives abroad (NRI), if decisions regarding the HUF’s affairs are taken in India (e.g., by a family member with Power of Attorney or during Karta’s visits), the HUF is a Resident.

Non-Resident HUF

An HUF is a Non-Resident only if its control and management are situated wholly outside India. This is rare for families with assets in India, as some management usually occurs locally.

ROR vs. RNOR Status

If an HUF is a Resident, it is further classified based on the Karta’s status:

• Resident and Ordinarily Resident (ROR): If the Karta satisfies the additional conditions applicable to individuals (Resident in 2 out of 10 preceding years + in India for 730 days in 7 preceding years).
• Resident but Not Ordinarily Resident (RNOR): If the Karta does not satisfy the above additional conditions.

Impact: An ROR HUF is taxed on its global income. An RNOR or Non-Resident HUF is taxed only on income accrued or received in India.

HUF Tax Slabs

For FY 2025-26 (Assessment Year 2026-27), HUFs are taxed at the same slab rates as individuals (below 60 years). However, a crucial difference is that HUFs are NOT eligible for the Rebate u/s 87A. While a resident individual pays zero tax on income up to ₹12 Lakh (New Regime), an HUF pays tax starting from the basic exemption limit.

New Tax Regime (Default for FY 2025-26)

Note: Surcharge and Health & Education Cess (4%) apply as per standard rules.

Old Tax Regime (Optional)

Important Note: Since HUFs do not get the Section 87A rebate, an HUF earning ₹7 Lakh in the New Regime will pay tax on the amount exceeding ₹4 Lakh (i.e., 5% on ₹3 Lakh = ₹15,000 + Cess), whereas an individual would pay zero.

Tax Benefits of HUF

The primary allure of an HUF is its status as a separate tax entity. This allows for “income splitting,” where income that would otherwise be taxed at the highest slab (30%) in the hands of an individual is shifted to the HUF, where it enjoys lower slabs and separate deductions.

1. Separate Section 80C Limit

The HUF has its own ₹1.5 Lakh limit under Section 80C. You can invest in tax-saving instruments in the name of the HUF:

• ELSS Mutual Funds (3-year lock-in)
• PPF (Public Provident Fund) in the name of the HUF (Note: New PPF accounts for HUFs were discontinued in 2005, but existing ones continue. Most HUFs now use ELSS or Tax-Saver FDs).
• Life Insurance Premiums for members.

2. Section 80D Deduction

The HUF can claim a deduction for health insurance premiums paid for its members. This is separate from the individual member’s own 80D limit.

• Limit: ₹25,000 (or ₹50,000 if the member insured is a senior citizen).

3. Capital Gains Exemptions

HUFs can claim exemptions under Section 54 and 54F. If an HUF sells a capital asset (like property) and reinvests the proceeds into a residential house, it can claim tax exemption, provided the conditions are met.

4. IPO Applications

HUFs effectively double your chances in IPO allotments. You can apply for an IPO in your individual name and separately in the name of your HUF.

• Category: HUFs can apply under the Retail Category (investments up to ₹2 Lakh) or the NII/HNI Category (investments above ₹2 Lakh).

Advantages & Disadvantages of HUF

Before rushing to form an HUF, weigh the structural pros and cons. It is easy to form but difficult to dissolve.

Advantages

• Tax Efficiency: Reduces overall family tax liability by utilizing an extra basic exemption limit (₹4 Lakh in New Regime).
• Wealth Creation: Facilitates building a separate corpus for the family’s future needs.
• Loan Eligibility: HUFs can apply for home loans or business loans in their own capacity.
• Insurance: Can pay premiums for members, ensuring coverage while saving tax.

Disadvantages

• Common Ownership: Assets transferred to an HUF become joint property. The Karta cannot sell them without the consensus of all members, which can lead to disputes.
• Dissolution Complexity: Closing an HUF requires a “Total Partition.” You cannot simply close it like a bank account; legal distribution of assets is mandatory.
• Clubbing Provisions: If you transfer personal assets to the HUF without adequate consideration, the income generated from those assets may still be clubbed with your individual income u/s 64(2).

How to Dissolve an HUF?

Dissolving an HUF is legally termed as “Partition.” As per Section 171 of the Income Tax Act, only a Total Partition is recognized for tax purposes. Partial partition (where some assets are divided while others remain joint) has been derecognized since 1978.

The Process of Total Partition

1. Consensus: All coparceners must agree to the partition.
2. Partition Deed: A legal deed must be executed on stamp paper, detailing the division of all assets and liabilities.
3. Physical Division: Assets must be physically divided (e.g., transferring funds, changing property titles). Mere book entries are often rejected by tax officers.
4. Application to AO: The Karta must make an application to the Assessing Officer (AO) claiming partition.
5. Order u/s 171: The AO will conduct an inquiry. If satisfied, they will pass an order under Section 171 recognizing the partition. Only after this order does the HUF cease to exist for tax purposes.

Warning: Until the AO passes the order, the income will continue to be assessed in the hands of the HUF, even if the family has practically divided the assets.

Conclusion

A Hindu Undivided Family (HUF) is one of the most underutilized tax-saving vehicles in India. By legally separating family income from individual income, you can significantly lower your tax outgo and build a dedicated corpus for generational wealth. However, the decision to form an HUF should not be taken lightly—it involves sharing asset ownership and adhering to strict compliance norms.

Ready to optimize your family’s wealth structure? Open your PL Capital account today and start managing your HUF investments with professional guidance.

FAQs on HUF

1. What is the Purpose of HUF Account?

The primary purpose of an HUF account is to consolidate family assets and income into a separate tax entity. This allows the family to avail of an additional basic tax exemption limit and separate deductions (like Section 80C), effectively reducing the overall tax burden on the family unit.

2. Should I Select HUF or Individual?

You cannot “select” one over the other for your personal income. You file as an Individual for your salary and personal earnings. You file as an HUF only for income generated from ancestral property or assets specifically transferred to the HUF. Most smart investors utilize both to maximize tax efficiency.

3. What is HUF in IPO?

In an IPO, an HUF is treated as a distinct investor category. You can submit one application under your individual PAN and a second application under your HUF’s PAN. This validly doubles your application slots in the Retail or NII category, increasing your probability of allotment in oversubscribed issues.

4. Can a salary be earned by an HUF?

No, an HUF cannot earn a salary. Salary is compensation for individual skills and employment. However, an HUF can pay a salary to its members (including the Karta) for managing the HUF’s business affairs, and this salary is a deductible expense for the HUF.

5. Is the Karta the only one who can manage the HUF?

While the Karta is the legal head and signatory, they can grant a Power of Attorney to another member to manage day-to-day affairs. Additionally, all adult coparceners have a right to ask for accounts and partition, ensuring checks and balances within the family structure.

The information provided is for educational purposes based on Income Tax Act, 1961 and rules applicable for FY 2025-26. Tax laws are subject to change. Investors are advised to consult a Chartered Accountant for specific tax planning. PL Capital does not guarantee tax savings.