An HUF is taxed separately from its members, allowing it to claim deductions and exemptions under tax laws independently, including those under Section 80. 
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An HUF is taxed separately from its members, allowing it to claim deductions and exemptions under tax laws independently, including those under Section 80. Budget 2025: Indian families are now recognising the financial benefits of forming a Hindu Undivided Family (HUF), a legal entity that provides substantial tax advantages according to the Income Tax Act.
Income tax is a compulsory payment on the income of individuals and various entities, such as HUFs, businesses, cooperative societies, trusts, and other organisations. Taxable income is determined by applying specific slabs, which involve subtracting exemptions, deductions, and rebates from the total income.
The income tax rate for HUFs is the same as for individuals, with an exemption threshold of Rs 2.5 lakh and eligibility for tax benefits under various sections like 80C, 80D, 80G, and others. Additionally, HUFs can take advantage of exemptions under Section 54 and 54F in relation to capital gains.
In the recent Union Budget 2024, FM Nirmala Sitharaman introduced changes in personal taxation that may not have been as favorable for HUFs. The sole relief provided was a reduction in the TDS rate to 2% from the previous 5% for rents exceeding Rs 50,000 paid by an individual or HUFs.
What is Hindu Undivided Family (HUF)?
Families belonging to Hindu, Buddhist, Jain, and Sikh communities have the option to form a Hindu Undivided Family (HUF) to reduce their tax burden. By consolidating assets under the HUF, tax liability can be minimized. The HUF is treated as a separate entity for tax purposes, with its own PAN and separate filing of tax returns distinct from its members.
Salaried individuals looking to establish an HUF to generate additional business income can benefit from it. An HUF that inherits property through a will can also benefit, as the income generated from such property will be considered the HUF's income.
How does the Hindu Undivided Family (HUF) function?
The HUF comprises a Karta, coparceners, and other members. The Karta is authorized to manage transactions and sign cheques on behalf of the HUF. Coparceners are individuals born into the undivided family, such as a father and son or daughter. Meanwhile, members include those who join the family through marriage, such as the mother and wife.
Taxes for HUFs
According to section 2(31) of the Income-tax Act, 1961, the Hindu Undivided Family (HUF) is considered a legal entity for assessment purposes. An HUF is assigned its own Permanent Account Number (PAN) and is required to file tax returns separately from its members.
The taxation of income for a Hindu Undivided Family (HUF) and the calculation of tax liability are determined based on its residential status. Income taxable for an HUF is categorised under four heads of income, and the tax is calculated based on the applicable tax rates for that financial year.
The regular income of an HUF is subject to taxation according to the slab rates specified in the Finance Act or the new tax regime outlined in Section 115BAC.
Besides, any income generated by the HUF exceeding Rs 1,25,000 or any long-term capital gains of Rs 1,25,000 or more are tax-free when held by the HUF. This characteristic of HUFs enables individuals to establish an effective tax-saving entity within their family.
Tax savings for Hindu Undivided Families
Creating a family unit and pooling assets to form an HUF can lead to tax savings. An HUF is taxed separately from its members, allowing it to claim deductions and exemptions under tax laws independently, including those under Section 80. This structure is commonly used by families to accumulate assets.
Families with ancestral properties and businesses often obtain a separate PAN for the HUF to assess incomes from its assets and businesses separately, lowering the overall tax liability. An HUF is subject to the same tax rates as individual income tax assesses and can also take out insurance policies on the lives of its members.
The Hindu Undivided Family (HUF) has the option to buy life insurance policies for its members and avail a deduction under Section 80C of the Income Tax Act on the premium paid. Since the HUF has its own PAN and files tax returns independently, it can benefit from this deduction. Additionally, the HUF is allowed to select either the old or new tax regime, similar to individual taxpayers.
Budget 2025 expectations
Taxpayers, including individuals, Hindu Undivided Families (HUF), and pensioners, have been eagerly anticipating an increase in the tax deduction limits under Sections 80TTA and 80TTB. Section 80TTA of the Income Tax Act, 1961, allows for a deduction of up to Rs 10,000 on the interest earned from savings accounts held with banks, co-operative banks, or post offices. It is important to note that this deduction does not apply to interest earned from fixed deposits or recurring deposits. Eligibility for the Section 80TTA deduction is limited to individuals below the age of 60 and HUFs.
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