Today, I will tell you what is HUF and how can you save tax with HUF which is separate entity for income tax purposes. You can enjoy 4 lacs of annual income with zero tax legally based on current tax brackets as of 2020.

Who is eligible?

If you are a Hindu or Jain or Sikh family of at least 3 people (husband, wife and one kid), then the eldest male member (husband in this case) can create Hindu Undivided Family (‘HUF’) deed and request a PAN card from the income tax department. HUF is treated as a separate entity for income tax assessment in India. Once you grow the HUF assets over the years, you can start earning up to 4 lacs annually tax-free as interest income from the HUF assets.

Is it worth the hassle?

Yes. While critics continue pointing out how difficult it is to close a HUF or how tough it would become to maintain due to more members over a couple of generations, I cannot find another legal way that can earn me a tax-free income of 4 lac every year. Therefore, I went ahead, talked to my CA and implemented the below steps, so can you.

What is HUF?

Let’s take an example and go through below 7 steps. Mr. Ram Sharma and Mrs. Nidhi are married. They have two kids Ryan and Karishma.

HUF for Ram and Nidhi is formed on the day of their marriage. Let’s say the name of HUF is Ram Sharma HUF. For this HUF, Ram is Karta, Nidhi, Ryan, and Karishma are co-parceners. All co-parceners are members but all members are not co-parceners.

In the future, the wife or husband of Ryan or Karishma will become members of HUF. Kids of Ryan or Karishma will be co-parceners of the HUF. Ryan and his wife can form their separate HUF and remain part of Ram’s HUF. Similarly, Karishma and her husband can form their separate HUF and remain part of Ram’s HUF.

What makes HUF a separate tax entity?

Each HUF is a separate entity for tax purposes provided there are 2 co-parceners. For example, you are married and have a family of at least 3 (husband, wife and one kid). The HUF applies to Hindu, Jain and Sikh families only.

How to create HUF deed and apply for PAN card?

Step 1 – Create HUF deed.

Buy a 100 rs non-judicial stamp paper, fill the details and sign and stamp. See the sample here.

Step 2 – Apply for PAN card

It is very easy process and you can apply online. You need to provide address proof, id proof and HUF deed. Check Online process here

It is recommended to use <Karta First Name> <Last Name> HUF as the name of HUF e.g. Ram Sharma HUF. In the form make if last name in case you have issues with the first name field. PAN card approval takes about 7 days and sent to your home or email. Use the PAN card to open a bank account.

How to fund and grow HUF assets?

Step 3 – Fund HUF with gifts from non-members.

Annually HUF can get gifts of 2.5 lacs basic exemption + 1.5 lacs to invest in 80 C and claim as income from other sources without any tax implications. To simplify, I limit gift to 2.5 lacs of basic exemption limit. HUF member or Karta should not give gifts to the HUF else the income generated from the gift is taxable in the hands of the donor i.e. HUF member. In our example, Mr. Ram can use the gifts received from his parents or relatives who are not members of his HUF and add to the HUF account and invest each year. Mr. Ram can use his ancestral property as the fund for HUF and any income from that property will be income of Ram Sharma HUF and not the income of Mr. Ram.

Step 4 – Invest and grow HUF assets

Open Demat account in the name of HUF with a discount broker or full-service broker. I prefer Zerodha for mutual funds and stocks while ICICI direct for NCD, IPO, corporate fixed deposits. If you add gifts of 2.5 lacs to the HUF each year for the next 12 years and invest the money in equity mutual funds or debt funds or tax-free instruments, the assets will grow and you would have about 50 lacs in 12 years with 8% rate of return (conservative). If you reach the 50 lacs figure early, good for you!

How to generate income from HUF?
Step 5 – Withdraw monthly income

Finally, you start to save tax with HUF for long run. You can then start withdrawing about 8% or investment return rate whichever is lower of the asset of 50 lacs. 8% of 50 lacs are 4 lacs annually for the rest of life. Out of 4 lacs, the first 2.5 lacs are exempt. You can use the remaining 1.5 lacs to pay life insurance of HUF members or ULIP or PPF or reinvest in any of 80C eligible investments like ELSS mutual funds to claim 1.5 lac deduction and zero tax. Or pay tax @ applicable rate of 5% which is still lower than the individual tax rate of 10 to 30% for the majority of the tax payers.

Important Tips

It is a wise idea to move the majority of funds to debt funds or liquid funds or FD when you start your withdrawal and keep about 20% or less in equity funds which are volatile in short term. I plan to move 80% of HUF assets from equity to debt/FD in year 8 and start enjoying the fruits.  

Remember, the key is to build HUF assets without realizing the income for the first 10 years using instruments such as equity or debt mutual funds or tax-free bonds. In the case of FD, the income is realized every month or quarter or year per your interest payout selection. In that case, you can subtract the income from tax-free limit to come up with the amount of gift HUF can receive without tax implications. You can also loan the money to HUF with proper documentation if the gift option is not available.


We covered the minimum required details to educate you from the creation of the HUF bank account to build assets to reap the benefits as you continue to save tax with HUF. If you already have assets like ancestral property, your HUF can start getting income immediately. You can also use the HUF to run your business.

If you have more questions, I recommend to check out this a great video by Yadnya academy on YouTube that explains HUF in detail. I am recommending it because it is well explained. Go ahead, talk to your Chartered Accountant and take your first step.

Again, it’s all about making money while you sleep and you need to make your assets earn for you in the most tax-efficient manner, in this case, tax-free manner! Go ahead and save tax with HUF.