The Hindu Undivided Family is one of the most underused legal tax saving tools in India. I am serious. Most people have never heard of it, or they think it is too complicated. It is not. Let me explain what it is and why you might want to consider it.
Think of an HUF as having an extra person in your family for tax purposes. The HUF is a separate entity. It gets its own basic exemption limit. Under the new regime, that is Rs 4 lakh. It gets its own 80C deduction, up to Rs 1.5 lakh. It gets its own 80D for health insurance. And here is the good part. It gets its own capital gains exemption under Section 54 when you sell a property. So if you and your HUF both have property gains in the same year, you can each claim the exemption. That can save a lot of tax. The HUF files its own return. It has its own PAN. It can have its own bank account, its own mutual fund folios, its own property. Legally, it is a distinct taxpayer.
The tricky part is funding it. You cannot just gift money to the HUF. If you do, the income from that gifted amount gets clubbed back to you under Section 64(2). The taxman says, you gave the money, so the income is yours. That defeats the whole purpose. So how do you fund an HUF without clubbing?
Here is the smart way. Give an interest-free loan to the HUF. I know it sounds odd. You are not gifting. You are lending. The HUF uses this loan money to invest. The income from that investment is not clubbed back to you. Why? Because the money came as a loan, not as a gift. The HUF owes you that money. The income it earns is the HUF's income. It gets taxed in the HUF's hands at its own slab rate. So if your HUF has no other income, it pays zero tax on the first Rs 4 lakh. You can build a decent corpus in the HUF over time. The loan stays on the books. You can withdraw it later if you need to. Or you can convert it to a gift when the time is right. The point is, the income is not clubbed. That is the key.
The cleanest way to fund an HUF is through inheritance via a Will. When a family member dies and leaves assets to the HUF in their Will, that money comes in without any clubbing issues. It is a genuine transfer. Many families do this. The grandfather's Will says a portion of the property goes to the HUF. The HUF then holds it, earns rent, and pays tax at its own rate. Over generations, this can create significant tax efficiency. The HUF can also receive gifts from non-family members. Gifts from your wife, for example, can get clubbed. But gifts from your parents or in-laws to the HUF may work differently. The rules are nuanced. Talk to a CA before you do anything.
Setting up an HUF is not hard. You need a deed. You need to open a bank account. You need a PAN. The Karta, usually the eldest male member, manages it. In 2025, courts have also allowed women to be Kartas. So the structure is evolving. The paperwork is a one-time thing. After that, you run it like any other investment entity.
I think the HUF is underused because people do not know about it. Or they assume it is only for rich families with ancestral property. That is not true. Even a middle-class family with two earners can benefit. If you have an HUF, you can split income. You can claim double 80C. You can use the HUF to invest in your child's name for their future. The possibilities are there. Yes, it requires some setup and some discipline. But for people who are serious about tax planning, it is worth looking into. One of the best legal tools we have, and most of us never use it. Maybe it is time to change that.