How to set up a HUF to save taxes in the right way?
This article explains what you need to do to save tax by creating a HUF.
This article explains what you need to do to save tax by creating a HUF.
This article is a part of our detailed article series on the concept of tax saving using HUF in India. Ensure you have read the other parts here:
This article explains how HUF taxation works, the rules on transfers and gifts, and the best strategies to build a dividend-paying portfolio under HUF ownership.
This article compiles an exhaustive list of FAQs on the concept of tax saving by creating an HUF.
A Hindu Undivided Family (HUF) is a separate “taxable person” in terms of tax payment with its own PAN card and bank account. Any income (rent, interest or capital gains) from assets correctly transferred to the HUF will be taxed separately. The HUF should consider which tax regime is best for it: old or new.
Here is a HUF with ₹10 lakhs of rental income and ₹30 lakhs of salary income operating in the new tax regime using the calculator here: Which is the best tax regime to choose from April?
(amounts in ₹ lakhs) | Without HUF | With HUF |
---|---|---|
Rental income | 10.00 | 10.00 |
Salary income | 30.00 | 30.00 |
Total income of members | 40.00 | 30.00 |
Total income of HUF | 0.00 | 10.00 |
Tax on rent | combined with salary | 0.62 |
Tax on salary | 9.36 | 6.24 |
Total tax | 9.36 | 6.86 |
Saved tax | – | 2.50 |
Transferring assets into the HUF, to save tax, is not easy. There are two rules that need to be followed:
In this article, assets refer to
It is important to note that assets once transferred into the HUF give ownership rights to all HUF members.
If you, as a HUF member, gift a property worth say ₹50 lakhs (market value) to a HUF for free (no consideration) or at below market price, then income from this property (rent or capital gains) will be taxed in your hand due to income clubbing rules.
If you, as a HUF member, loan ₹10 lakhs to the HUF at say 1%/year and the HUF invests the amount at 5%, then on paper there is no tax on the 4% difference in returns. This plan is considered a form of tax evasion that is illegal.
We will understand this case under Section 56(2)(x).
Unfortunately, while members of the HUF can transfer any amounts into the HUF without incurring gift tax, the income on that transfer will be clubbed into the hands of the members who made the transfer.
There is no limit to the transfer itself to make it gift-tax free, such as ₹50,000/year.. However, suppose the HUF generates income on this, via interest or dividends. In that case, that income is clubbed into the hands of the member who made the transfer, thereby negating any tax savings.
To understand if you should create your own HUF:
Any ancestral property passed down, via father/grandfather/great-grandfather, to the HUF will be exempt from both gift tax and tax on future rent or capital gains. There will not be any clubbing.
As in the above case, a property transferred to the HUF via a will, whether from a member or a non-member, is also similarly tax-free.
Non-members, who are not a part of the HUF, are automatically not relatives of the HUF. We know that from non-relatives, only gifts up to ₹50,000/year are tax-free. Therefore, if a HUF receives up to ₹50,000/year as gifts from non-members, it is tax-free.
If the HUF invests its own assets and gets income/rent/capital gains, then that is tax-free and not clubbed.
Any assets transferred into a different HUF by splitting (partitioning another HUF) are similarly tax-free.
Published: 28 May 2025
14 MIN READ
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This post titled How to set up a HUF to save taxes in the right way? first appeared on 23 Jun 2024 at https://arthgyaan.com