When it comes to saving taxes, most individuals rely on common deductions like Section 80C or standard exemptions. However, there is one highly effective yet often overlooked strategy that can significantly reduce your tax burden: the Hindu Undivided Family (HUF).
If you are wondering how to save tax with HUF, this article will break down the potential benefits and guide you through how it can help your family save taxes effectively.
What is HUF and Who Can Form It?
How to save tax with HUF is a question many people ask, and the answer lies in the legal framework for forming an Hindu Undivided Family (HUF). If you are Hindu, Jain, Sikh, or Buddhist, your family is eligible to form an HUF. An HUF is treated as a separate taxpayer. It has its own PAN, files its own tax returns, and gets an additional ₹12 lakh exemption under the new tax regime introduced in Budget 2025.
In other words, by forming an HUF, your family can benefit from additional exemptions, ensuring that both individual and HUF incomes are taxed separately, optimizing the tax slabs.
How HUF Helps You Save Tax
Let’s explore how to save tax with HUF effectively. Here’s a simplified example:
Example Scenario
Consider an individual earning ₹12 lakh annually. Now, imagine that this person receives an additional ₹12 lakh in income through rental properties, fixed deposits, or debt mutual funds. This additional ₹12 lakh would fall into the highest tax bracket and be taxed at 30%, leading to a tax outgo of ₹3.6 lakh.
However, if the same ₹12 lakh is routed through an HUF, which enjoys its own ₹12 lakh exemption under the same regime, the entire income could potentially be tax-free. This results in a savings of ₹3.6 lakh or more, simply by leveraging the tax benefits of HUF.
Types of Income That Can Be Routed Through HUF
There are several types of income that can be routed through the HUF to maximize your tax savings. These include:
- Income from fixed deposits
- Rental income from properties
- Debt mutual funds
- Passive income sources
In addition, equity investments made through an HUF offer the benefit of long-term capital gains tax exemptions, making it an ideal choice for tax-efficient investing.
Setting Up and Managing an HUF
Forming an HUF is relatively straightforward. Here are the steps to set it up:
- Draft a declaration deed stating the intent to form an HUF.
- Apply for a PAN card for the HUF.
- Open a bank account in the name of the HUF to handle income and expenses.
- The entity can then receive gifts, inheritances, and manage family-owned investments independently.
Common Mistakes to Avoid When Setting Up an HUF
While setting up an HUF is a smart tax-saving move, there are a few mistakes to avoid:
- Mixing personal and HUF funds: Keep HUF and personal funds separate to maintain legal compliance.
- Failure to maintain proper records: Ensure proper documentation to avoid future disputes and ensure tax filings are accurate.
It’s also important to note that you don’t need a large joint family to create an HUF. A married couple qualifies as well, which makes this option more accessible than many people think.
How HUF Helps in Long-Term Tax Planning
Setting up an HUF isn’t just about saving taxes now; it’s a powerful tool for long-term tax planning. By ensuring that family income is split across two taxable entities — the individual and the HUF — you can effectively take advantage of the tax exemptions and lower tax slabs available.
The HUF structure helps with multi-generational wealth preservation, and provides a tax-efficient way to distribute wealth over generations, making it a crucial strategy in long-term family financial planning.
How to Save Tax with HUF
If you are looking for a smart way to save tax, forming an HUF is one of the most powerful yet underused strategies. By routing your income through an HUF, you can potentially save ₹1.2 lakh or more in taxes annually without violating any laws.
At Enrichwise, we specialize in tax planning and wealth management. Our team can help you set up an HUF, manage your family’s investments, and ensure your wealth is growing efficiently and legally. Whether you’re new to this structure or looking for guidance, we are here to help.
Interested in setting up your own HUF? Contact us today!
