India has been home to the joint Hindu family culture as a social and economic unit where families share residence, property and wealth. ‘Hindu Undivided Family’ (HUF) has functioned as most effective tax savings strategy and a tool for passing on wealth from one generation to the next on autopilot terms. However, with changing family dynamics and legal framework, ‘Private Trust’ has emerged as a modern alternative.  

In this blog, we’ll explore whether an HUF is efficient as a succession tool and which structure may suit your family better. 

What is an HUF?

HUF is essentially a joint family structure prevalent in Hindu law that allows family members to pool assets and income under a single legal entity, enabling succession planning. HUF is a distinct legal entity recognised under the Income Tax Act, 1961 (the Act), taxed separately from its individual members.  

Head of the HUF is called the Karta who is the senior most member of the family who manages the HUF. Members of the HUF are determined either by birth (including adoption) or by marriage into the family. This lineage-based membership extends to include wives and unmarried daughters of the male members. 

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All members are not co-parceners to the HUF, as co-parceners can only be the lineal descendants (male or female) of a common ancestor. In an HUF, ownership and share in the joint family property dynamically adjusts with births and deaths in the family, affecting its distribution among members. Further, co-parceners’ right in the family property are legally protected and cannot be altered by anyone. 

Who is eligible to form an HUF?

  • Hindu, Sikh, Jain and Buddhist families can form an HUF. 
  • Muslim, Christian or Parsi families cannot form an HUF. 
  • Minimum of 2 persons are required to form an HUF. 
  • An HUF can be created upon marriage as well. 

Taxation of an HUF

HUF is a separate legal entity i.e. distinct from its members under the Act. All the income earned is taxable in its own hands at the rate applicable to HUF, independent of individual tax liabilities of its members, helping families reduce their overall tax liability by legally splitting income. 

The residential status of an HUF is determined based on the place of effective management and control, which is generally influenced by the location where key decisions are made and the residential status of the Karta. 

Any asset transfer to HUF will be tax exempt, however, any asset transfer from HUF to its member is subject to tax in the hands of member as HUF does not fall under the definition of relative of the individual. Nevertheless, any transfer of asset on partition of HUF is tax exempt. 

Key tax benefits such as 80C, 80D, 80G of the Act, interest deductions as well as capital gains deduction are also available for HUF, except rebate.  

Additionally, stamp duty is levied on HUF property transfer at the rates prescribed by state. 

Challenges faced by HUF

  • In HUF, beneficiaries to the property are pre-determined by birth/adoption or marriage. Everyone in the family is a lawful beneficiary. Thus, no one can be specifically excluded from benefitting from HUF.  
  • Karta cannot control the distribution pattern as all the coparceners have equal right in the property. He cannot set any conditional based distribution arrangements for specific beneficiaries. 
  • HUF is not suitable for families with global presence. 
  • Karta’s personal assets can be attached to satisfy debts of family business undertaken through HUF, as held by the Bombay High Court1. Thus, Karta does not enjoy limited liability.  

What is a ‘Private Trust’ and how it is more relevant?

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A private trust is separate arrangement governed by the Indian Trusts Act whereby the settlor (a person creating the trust) transfers ownership of his assets to the trust for the purpose of managing and preserving wealth for benefit of specified beneficiaries. The trustee is appointed by the settlor to hold the property in representative capacity on behalf of the beneficiaries and not for his personal benefit.  

A beneficiary may also be the trustee of the trust. A private trust can be revocable or irrevocable trust, with shares of the beneficiary being either discretionary (at trustee’s discretion) or determinate (determined by the settlor). A revocable trust can be revoked by its settlor at any time. This is useful where the settlor wishes to retain control over the assets during his lifetime or for a certain period without having to go through the process of “probate” or “inheritance”. 

Taxation of Trust

Taxation for different types of trusts is as follows: 

Particulars  Revocable trust Irrevocable Discretionary Trust  Irrevocable Determinate Trust 
Separate entity under Income Tax Act  No   Yes 

 
Income earned   Clubbing provisions attract. Thus, taxable in the hands of Settlor   In the hands of trust  

 
Applicable rate  Slab rate applicable to Settlor  Maximum Marginal Rate (MMR)  Rates applicable to the beneficiaries 
Tax on distribution  No tax in the hands of beneficiaries upon receipt of distribution  

 

Comparing HUF and Private Trust

Below is a snapshot of how the two structures differs across several key aspects: 

  HUF  Private Trust 
Legal Nature & Eligibility  Exists by operation of Hindu law and applies only to certain religions. Membership arises by birth or marriage.  Can be created by any individual regardless of religion. Trustees and beneficiaries are designated in the trust deed. 
Tax Treatment  Separate taxable entity with its own tax slab and exemption limits, offering potential tax optimisation.  Taxed under Sections 160–164 of the Act, either in the hands of beneficiaries or at MMR depending upon the structure. 
Control & Flexibility  Succession and asset distribution are governed by Hindu succession laws and shared equally among coparceners, which limits flexibility.  The settlor has discretion to define how and when assets or income is distributed, including unequal shares and conditional inheritance. 
Asset Protection  While providing collective ownership, assets may be vulnerable to partition claims or disputes among coparceners. Also, Karta’s personal assets can be attached to satisfy debts undertaken through HUF  Offers stronger protection from creditors and litigation, since assets are owned by the trust. 
Management of business assets  Complex if multiple coparceners are involved, especially in case of disputes or partition.  Allows for smooth management of family business with clear roles and distribution of assets. 
Costs & Administration  Easier and less expensive to set up, with minimal formalities. Long-term management, however, can become complex if disputes arise.  Higher initial compliance and administrative costs, offset by flexibility and governance clarity. 
Global Family suitability  Not suitable for global families, co-ownership may create complications.  Ideal for global families, assets can be managed with clear distribution rules. 
Dispute Resolution  Dispute may arise because of equal rights of all coparceners and may lead to forced partition.   Settlor sets the terms and trustees manage assets according to predefined conditions. 

 

Which is best for your family’s future?

Both HUFs and Private Trust offer unique advantages when it comes to tax efficiency, asset protection and succession planning. However, the right choice depends on the family size, assets and future goals.  

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HUF: It works best for small/nuclear families with straightforward wealth management needs and limited assets. It offers simplicity and tax benefit but lacks flexibility in succession and asset protection. It is a simple tax efficient structure suitable to hold and manage ancestral or family assets. 

Private trust: They are particularly suitable for high-value estates, blended families, or situations requiring long-term wealth preservation and continuity. It provides flexibility, stronger asset protection, and the ability to customize inheritance and income distribution.  

For modern families, the flexibility and protection offered by Private trust outweigh the simplicity of an HUF.  

Conclusion

In essence, the suitability of HUF or private trust, largely depends on family’s objective, asset profile etc. The choice between an HUF and a Private Trust is not about which structure is better, but which structure aligns best with your family’s succession goals. A carefully evaluated and well-designed structure, often with professional advice can ensure a smooth, tax-efficient, and dispute-free transfer of wealth to future generations. 

Why Choose InCorp Global?

At InCorp, we understand that succession planning can be complicated. Our dedicated team of succession planning experts, legal professionals, tax and financial advisors are happy to assist you in both family and business succession planning. To learn more about our services, you can write to us at info@incorpadvisory.in or reach out to us at (+91) 77380 66622. 

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