Forming An HUF For Tax Perks: Smart Move Or An Unnecessary Hassle?

A Hindu Undivided Family (HUF) refers to a joint Hindu family and has different implications in terms of tax. We take a look at whether it makes sense for an individual to register as an HUF.

Before forming an HUF, one should think about whether it truly suits their circumstances. An HUF can only exist if there are at least two members, and it is most useful where there is ancestral property, business income, or rental income that can be managed together. For salaried income, it doesn’t really add value. “While the tax benefit of having a separate PAN and enjoying another set of deductions is attractive, it comes with extra responsibility, separate accounts, filings, and record keeping. Most importantly, any asset transferred to the HUF becomes family property and is no longer under the exclusive control of one person,” says Rohit Jain, Managing Partner, Singhania and Co.

Loss Of Control 

The main limitation of an HUF is the loss of individual control. Once assets are part of the HUF, all family members have a claim, and this can create conflict if the family decides to divide in the future. Equal rights of all coparceners, including daughters, can sometimes complicate matters further. For people with mostly salary income, the tax savings are often too small to justify the structure. “There is also the possibility that income from assets moved into the HUF may still be taxed in the individual’s name, and future changes in tax law could make the HUF less effective than expected,” says Jain.

HUF registration does alter succession dynamics compared to individual property ownership, as it adheres to Hindu law principles and takes away testamentary freedom. Under individual ownership, property holders enjoy complete discretion in asset distribution through wills and estate planning instruments.

Long-Term Complications 

But when it comes to HUF, assets follow predetermined succession rules where coparceners inherit equal shares by birth, limiting strategic estate planning flexibility. “The Hindu Succession Act governs HUF inheritance, ensuring automatic succession rights for lineal descendants but restricting the ability to favour specific beneficiaries or implement conditional inheritance structures,” says Manu Tiwari, senior associate, SKV Law Offices.

This becomes particularly significant for modern families seeking to incentivize education, professional achievements, or other conditional inheritances. Individual ownership allows testators to create trusts, establish charitable foundations, or implement sophisticated wealth transfer strategies that HUF structures cannot accommodate, which may be seen as a drawback by many.

While the HUF does enjoy immediate tax benefits that are definitely appealing, but may create long-term complications during actual succession events.

“The choice between HUF and individual ownership ultimately depends on family composition, succession objectives, and the importance of maintaining traditional joint family structures, which may be very important to some families,” says Tiwari.