Hindu undivided family tax benefits: Can salaried individuals also take advantage of them? Details here

A Hindu undivided family (HUF) is often associated with traditional business families, leading many salaried individuals to assume that they cannot form one. However, having business income is not a prerequisite for creating an HUF.

This entity comes into existence by operation of Hindu law when a family exists and Buddhist, Sikh, and Jain families can also form an HUF. In practice, it is usually constituted after marriage, when there is a common family unit.

The core benefit of forming an HUF is that it is treated as a separate taxable entity with its own PAN and income tax return (ITR). This allows eligible income to be taxed independently, deductions and exemptions to be claimed separately, and family investments to be managed under a common entity.

Now that we know about some of its features, it brings us to the key question: Can salaried individuals form an HUF, and more importantly, when does it actually make sense to do so?

How does taxation work for an HUF?

As discussed above, an HUF is a unique legal and tax entity that allows families to pool and manage their wealth and investments. It can help split eligible income, double your exemptions under various sections, and deploy investments for collective gains.

To understand how it works, suppose a person earns a salary of ₹12 lakh in a financial year and also has a family property that generates rental income. Depending on the amount of the rental income, taxing it in the individual’s hands could mean that it gets added to their total income.

If that happens, a larger portion of the salaried employee's income could be pushed into the higher tax slabs, thus increasing their tax burden.

However, if the rental income belongs to the HUF, the income can be assessed separately in the HUF’s hands. The family also gets the benefit of a separate taxpayer with its own tax slabs and eligible deductions. If all tax laws are complied with, it can reduce the overall tax significantly.

Can salaried employees benefit from an HUF?

Yes, a salaried employee is allowed to form an HUF but merely creating one will not reduce your tax outgo. For an HUF to have any tax relevance, it must also have its own income and assets.

A family member's salary cannot be treated as HUF income and will always be taxed in the hands of the individual who earns it.

An HUF becomes tax efficient if it earns income from sources such as a family business, inherited property, rental income, investments or eligible gifts.

Tax benefits of an HUF

Though standard deduction and rebate benefit is not available to an HUF, there are several other tax benefits that this entity can enjoy. These include:

• Basic tax exemption: Like individual taxpayers, HUFs are also eligible for the basic tax exemption up to ₹2.5 lakh annually if they choose old tax regime and ₹4 lakh for those opting for the new regime.
• LTCG exemption for equity investments: If both the HUF and an individual family member have separate demat accounts, each can independently claim the annual long-term capital gains (LTCG) exemption of ₹1.25 lakh on equity investments. This allows the family to avail a combined exemption of up to ₹2.5 lakh in a financial year.

• Home loan tax benefits: If the HUF is a co-borrower and co-owner of a property, both the individual and HUF can claim eligible deductions separately, according to a Groww report. This can allow deductions of up to ₹1.5 lakh under Section 80C for principal repayment and ₹2 lakh under Section 24(b) for interest, potentially increasing the overall tax benefit.
• Section 80C deductions: HUFs are also eligible for deductions of up to ₹1.5 lakh under Section 80C of the Income-tax Act. This benefit is available on investments such as PPF, SSY, SCSS, among others.
• Capital gains exemptions on property: HUFs can claim exemption from capital gains tax on the sale of a residential property by reinvesting the gains in another property. If the prescribed requirements are met, the tax liability on such capital gains can be reduced or eliminated.