Maximise your tax savings with an HUF: A smart yet underused strategy

As the financial year draws to a close, taxpayers to scramble to minimize their tax outgo. While common deductions under Sections 80C and 80D get all the attention, one powerful yet underutilised tax-saving tool remains overlooked—the Hindu Undivided Family (HUF). Many shy away from it, fearing complexity, but with the right approach, an HUF can be a game-changer for tax planning and long-term wealth preservation.

Read this | FAQs on HUF: Tax benefits, formation, and key rules explained

Here’s how you can leverage an HUF to unlock tax benefits while staying compliant with the law.

A common misconception is that introducing funds into an HUF is as simple as gifting money. However, tax laws dictate how capital can be contributed:

Gifting money: While family members can contribute funds, any income generated from these funds may be clubbed with the donor’s income under Section 64(2) of the Income Tax Act.

Ancestral property: The most common way to fund an HUF is through inherited assets. Income derived from such property belongs to the HUF and is taxed separately.

Business income: An HUF can operate businesses, with profits taxed in its own name rather than in the hands of individual members.

Loans from members or outsiders: An HUF can take loans from family members or third parties. If a reasonable interest rate is paid, the income remains separate from the lender’s tax liability.

The biggest advantage of forming an HUF is its ability to minimize tax liability. Here’s how:

1. Separate tax exemption limits: An HUF is treated as a distinct taxpayer and enjoys its own basic exemption limit of ₹2.5 lakh (or higher under the new tax regime), reducing the tax burden on individual family members.

2. Additional deductions: HUFs