What is a Hindu Undivided Family (HUF)?
A HUF is a legal entity that consists of all persons lineally descended from a common ancestor, including their wives and unmarried daughters. It is recognized under the Hindu Law and for income tax purposes under the Income Tax Act, 1961.
Using HUFs to Maximise Tax Efficiency on Mutual Fund Gains
A Hindu Undivided Family (HUF) is a commonly used tax planning structure in India, offering benefits such as slab-based taxation and deductions under Chapter VI-A—including Section 80C—when opting for the old tax regime.
“HUFs are taxed similarly to individuals, creating scope for significant tax savings,” explained Chintak Shah, Vice President at Anand Rathi Wealth Limited. “However, one must be cautious. Under Section 64, income from assets transferred to an HUF remains taxable in the original owner’s hands. Additionally, HUFs can sometimes create internal disputes or concentrate financial control with the Karta. So, forming an HUF requires a long-term perspective, not just a tax-saving mindset.”
Individual vs HUF Tax Liability
Scenario:
- Salary: ₹5,00,000 (₹4,25,000 after standard deduction)
- Short-Term Capital Gains (STCG): ₹2,00,000
- Long-Term Capital Gains (LTCG): ₹8,00,000
- Interest Income: ₹50,000
Individual Tax Liability:
- Salary: ₹4,25,000 → ₹8,750 tax after exemption
- STCG: ₹2,00,000 @ 20% → ₹40,000
- LTCG: ₹6,75,000 taxable (after ₹1,25,000 exemption) @ 12.5% → ₹84,375
- Section 87A rebate: ₹8,750
- Cess @ 4%: ₹4,975
- Total Tax: ₹1,29,350
HUF Tax Liability:
- Basic exemption of ₹3,00,000 offsets the entire STCG → ₹0 tax
- LTCG: ₹5,75,000 taxable (after exemptions) @ 12.5% → ₹71,875
- Cess @ 4%: ₹2,875
- Total Tax: ₹74,750
Net Tax Savings via HUF: ₹54,600
Why Consider an HUF for Mutual Fund Investments?
- Separate Taxation: HUFs are assessed independently, allowing better tax bracket management.
- Full Use of Exemptions: The ₹3,00,000 exemption and separate slab rates apply to the HUF as a separate entity.
- Efficient Wealth Growth: Mutual fund investments under an HUF benefit from long-term compounding and lower tax leakage.
- Family-Centric Planning: Returns can be directed toward joint needs like real estate or family wealth creation.
Recent Legal Developments
- The Supreme Court and CBDT have clarified that married daughters can be coparceners.
- The Karta role is no longer gender-restricted, giving women more legal standing.
When Should You Consider Forming an HUF?
You have ancestral property generating income
You’re in a high tax bracket and want to optimize taxes
You want to create a separate financial entity for family business or wealth
Final Thoughts
A Hindu Undivided Family can be a powerful tool for tax saving, succession planning, and asset management, but it’s not without complications. To consult a chartered accountant or tax advisor before forming an HUF to fully understand the implications for your family’s finances. Contact us.